On 12 September 2017 the Hon Kelly O’Dwyer MP (Minister for Revenue and Financial Services) announced that “The Turnbull Government is taking action to crack down on illegal phoenixing activity that costs the economy up to $3.2 billion per year to ensure those involved face tougher penalties.”
Illegal phoenixing is the stripping and transfer of cash and assets from one company to another by individuals or entities to avoid paying creditors (including the ATO). The business then continues under another guise or name “like a phoenix from the flames”. The original company often ends up being liquidated with creditors being left out of pocket. The practice hurts many: employees, creditors, competing businesses and tax payers.
Phoenixing hurts small business. When companies phoenix it’s usually the subcontractors and small businesses who suffer; they’re the ones who aren’t paid.
Kate Carnell
The Australian Small Business and Family Enterprise Ombudsman
A three-year investigation by researchers at the University of Melbourne Law School and Monash Business School has made 25 recommendations on how to clamp down on unscrupulous directors1. University of Melbourne corporate law expert Professor Helen Anderson, who led the study, said:
It is hard to believe, but at the moment it is more difficult to obtain a driver’s licence or a bank account than it is to become a company director – there are no identity or background checks.
The situation is causing terrible pain. Not only are small traders and consumers suffering significant financial damage as debts are not repaid and deposits are lost, but as a law-abiding tax payer myself the cost in unpaid taxes drives me crazy.
Dodgy directors are going under the radar where the regulators can’t join the dots.
The proposed package of reforms includes the introduction of a Director Identification Number (DIN) (recommended by the Productivity Commission in December 2015). The DIN will identify directors with a unique number and will be used by various government agencies to allow regulators to map the relationships between individuals and entities, and individuals and other people.
In addition to targeting illegal phoenixing activities, the government is aiming to curb the activities of pre-insolvency advisors (by making them potentially liable for their advice).
The Government is consulting on the best model of DINs to introduce, and also on a range of other possible measures to tackle illegal phoenixing, including:
- Extending the director penalty provisions by making directors personally liable for GST liabilities.
- The establishment of a dedicated phoenix hotline to provide the public with a single point of contact for reporting illegal phoenix activity.
- Extending, in order to capture advisors who assist phoenix operators, the penalties applied to those who promote tax avoidance schemes.
- Stronger powers for the ATO to recover from suspected phoenix operators a security deposit that can be used to cover outstanding tax liabilities, should they arise.
- Restricting directors from backdating their resignation (to avoid personal liability) or leaving a company with no directors.
- A next-cab-off-the-rank system for appointing liquidators (to prevent the appointment of “friendly” liquidators who turn a blind eye to phoenixing).
- Specific phoenixing offences to better enable regulators to take decisive action against those who engage in this illegal activity.
- Prohibiting entities related to the phoenix operator from appointing a liquidator.
- Allowing the ATO to retain tax refunds.
- Allowing the ATO to commence immediate recovery action following the issuance of a Director Penalty Notice.
There are many existing laws that can be employed against illegal phoenix activity and serial inept entrepreneurs, however the current “system” of disruption, prevention, detection and redress is under-resourced, in terms of legislative power, information and finance. The proposed package of reforms, if implemented, will make a significant impact on this business, and societal, issue.
October 2017