Government takes steps to combat illegal phoenixing in Australia
Published: 03 Oct 2019
If you thought that if you looked long and hard enough you would eventually find what you were looking for in the Corporations Act 2001 (Cth), well you were wrong. Illegal phoenix activity which is an activity which poses substantial risks to tax revenue (including PAYG, GST and other taxes), employee entitlements and the integrity of the corporate system is not even mentioned.
Illegal phoenix activity is when one company which is insolvent strips itself of its assets to avoid paying its debts and another company is created to continue the business of the first company. The assets of the first company are transferred to the new company. As inadequate consideration is paid to the first company for the assets, creditors are precluded from taking legal action to recover debts owed to them by that company. It is a business practice which enables tax evasion and imposes an unfair burden on Australian tax payers, in particular on that company’s competitors.
The most effective method of addressing the issue would be to criminalise such activity, but if the Government took that route, it would be an arduous task and possibly require establishing an entire new regulatory body to police the activity. So, until very recently, phoenix operators were able to take advantage of the absence of legislation preventing them from rebirthing themselves and avoid liquidator clawbacks.
However, in July this year, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 was introduced into the House of Representatives. This Bill introduces new phoenixing offences to prohibit creditor-defeating dispositions of company assets, imposes penalties on those who engage in or facilitate deliberate insolvency as a business model to avoid paying company debts, and allows liquidators and ASIC to recover any property which has been disposed of in such manner. In addition, the Bill has provisions to deter directors from backdating resignations or ceasing to be a director when this would leave the company with no directors.
The Bill also proposes to broaden the powers of the Commissioner to:
i) estimate an entity’s net amount of GST liabilities and that amount will become payable the day the entity is required to lodge its business activity statement (BAS);
ii) retain tax refunds where a taxpayer has failed to lodge a return or provide other information the Commissioner requested in order for the Commissioner to make a proper assessment of the tax refund entitlements; and
iii) extend the instances in which directors may be held personally liable for their company’s unpaid GST liabilities (At present directors have to pay any outstanding PAYG withholding amounts, superannuation guarantee charges and estimates of PAYG withholding liabilities and superannuation guarantee charges. The new law proposes that directors may also be held accountable to pay any outstanding luxury car tax and wine equalisation tax liabilities and estimates of those liabilities).
If the Bill is passed, taxpayers will have to satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund. Liquidators (or creditors) would be able to apply to the court or ASIC for orders to recover assets of the company which have been disposed of or funds received due to the disposition of such assets by the company.
The aim is to improve compliance with statutory reporting and expose those entities that fail to comply. The challenge is to strike a balance between enabling genuine restructures (and providing safe harbours for directors if they can restructure to improve the results to creditors in the event of a liquidation) and deterring activities which enable companies to avoid accountability to the Australian Taxation Office and their creditors.