The Federal Government has a clear mandate: to take on illegal phoenix activity and stop small businesses getting ripped off. But the jury’s still out on how effective the government’s two-pronged plan, announced in the 2018 budget handed down in May, will be.
“The increased focus on illegal phoenix activity is long overdue. But it is obviously too early to tell whether these proposed measures will help eradicate/eliminate illegal phoenixing or, at the very least, provide a decent deterrent to operators who engage in the practice,” says Jirsch Sutherland Partner Amanda Young.
“As liquidators, our role in combatting illegal phoenix activity is vital, we need to be working in conjunction with the Australian Securities & Investments Commission (ASIC) in its role as both regulator and funder. This has been recognised by many policy-makers and industry bodies.
“Funding will be required for Liquidators to continue to conduct their investigations and report to ASIC, who then consider whether they prosecute the relevant individuals involved.”
Huge economic cost
Illegal phoenixing has long been a hot topic. As we discussed in a previous issue of JS Matters, companies that deliberately liquidate to avoid paying employees and creditors are costing the Australian economy a whopping $3.2 billion annually.
In handing down the 2018-19 Budget, the Federal Government bolstered the Australian Taxation Office’s (ATO) powers and increased directors’ personal liability. The new measures designed to deter and disrupt illegal phoenix activity include:
- Introducing new phoenix penalties that specifically target those who participate or facilitate illegal phoenix activity
- Preventing directors from backdating director resignation documents (designed to circumvent that director from being personally liable for their responsibilities)
- Preventing directors from resigning or leaving a company with no director to control the company’s affairs (abandoning it for the same objective above but also at another taxpayer expense to have ASIC wind it up)
- Restricting the ability of related-party creditors from controlling the outcome of external administrations
- Extending the current director’s penalty regime from just group tax and superannuation, to include GST, luxury car tax, and wine equalisation tax (making directors personally liable to pay those tax debts)
- Allowing the ATO to retain refunds where there are outstanding tax lodgements
It’s also reported that the Federal Government will bolster the ATO’s authority when it comes to retaining refunds in cases where there are outstanding tax lodgements.
Multi-agency approach combined with coordinated state and federal law enforcement
Jirsch Sutherland Partner Chris Baskerville says the Federal Government’s multi-agency approach to audits, investigations and prosecutions will make it easier to identify, manage and monitor suspected illegal phoenix operators.
“Key findings released last month after a dedicated taskforce conducted 263 audits and reviews resulted in $240.5 million in liabilities raised, seven criminal convictions, over $115.6 million in cash collected and 34 directors banned and disqualified from acting as directors,” he says. “Those are some startling stats!”
Federal treasurer Scott Morrison made special mention of phoenixing activity in his budget night speech, saying the reforms are meant to complement the work of the Serious Financial Crime and Black Economy taskforces.
“We are making sure small businesses don’t get ripped off by other businesses who deliberately go bust to avoid paying their bills,” he said.
The budget measure will cost $40 million over the forward estimates, to pay for extending the directors penalty regime to the GST, as the tax is currently collected and paid to the states and territories. The proposals are expected to have no financial impact on the commonwealth, in cash terms.
Shining the spotlight on the black economy
Turnbull’s proposed reforms follow recommendations made by the Black Economy Taskforce, which was established in 2016 by the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, to combat increasing threats from phoenix businesses.
The Phoenix Taskforce, which comprises 29 federal, state and territory government agencies, including the ATO, ASIC, Department of Employment, and the Fair Work Ombudsman, has developed sophisticated data matching tools to identify, manage and monitor suspected illegal phoenix operators.
“If these measures have the desired impact, it’s an excellent outcome,” says Amanda Young. “Too often, employees of companies may be left with outstanding wages, bills and unpaid superannuation, while suppliers and other businesses suffer as a result of unpaid contracts and bills, and customers also lose out when they don’t receive goods or services that they have paid for.”