On 12 September 2017, the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, announced a package of proposed reforms aimed at cracking down on illegal phoenixing activity.
Illegal phoenixing is the transfer (stripping) of assets from one company to another (at nil consideration or well below their true value) to avoid paying liabilities.
The Minister, in her press release set out a range of proposed reforms to address illegal phoenixing, including:
• The introduction of a Director Identification Number (DIN) which will identify directors with a unique number. The DIN will interface with various government agencies and databases to allow regulators to map the relationships between individuals and entities and individuals and other people;
• Extending the director penalty provisions to make directors personally liable for GST liabilities;
• Preventing directors from backdating their resignations to avoid personal liability or from resigning and leaving a company with no directors;
• Specific phoenixing offences to enable regulators to take action against parties who engage in this illegal activity;
• The establishment of a phoenix hotline for the public to report illegal phoenix activity;
• The extension of the penalties that apply to those who promote tax avoidance schemes to capture advisers who assist phoenix operators;
• Increasing the ATO’s powers to recover a security deposit from suspected phoenix operators; and
• Prohibiting related entities to the phoenix operator from appointing a liquidator.
The press release also states the Government will look into ways on how best to identify high risk individuals who will be subject to new preventative and early intervention tools, including:
• a next-cab-off-the-rank system for appointing liquidators;
• allowing the ATO to retain tax refunds; and
• allowing the ATO to commence immediate recovery action following the issuance of a Director Penalty Notice.
Illegal phoenixing has been a long standing practice by unscrupulous directors (and their advisers). In its September 2015 report “Business Setup, Transfer and Closure”, the Productivity Commission stated “It has been estimated that around 2000 businesses per year are involved in phoenix activity, at a total cost to employees, business and governments of $1.8 to $3.2 billion per year.”
In some cases, the same director will be involved in phoenixing of multiple entities over an extended period of time. It has recently been reported that one of the accused co-conspirators in the payroll company, Plutus’ $165 million fraud against the Australian Tax Office, previously engaged in phoenix activity and alleged fraud as part of his role in his former IT company.
Not all phoenix activity may involve illegal conduct. Genuine company failure and liquidation, is a legitimate use of the corporate form. For example, despite a director acting responsibly in running a company, circumstances may result in the company being unable to pay its liabilities. In that situation, the directors meet their obligation by appointing an external administrator (that is, a registered liquidator) who then sells the company’s assets to pay creditors. The directors may then (legitimately) start a new company which operates a similar business with the right advice and proper consultation.
For further information see ASIC Information Sheet 212.