‘Combatting Illegal Phoenixing’ – Treasury issues this Consultation Paper on implementing recommendations by its ‘phoenix’ and ‘black economy’ task forces

On 28 September 2017, the Revenue Minister: Kelly O’Dwyer announced the Treasury’s release of a consultation paper  entitled “Combatting Illegal Phoenixing”.

The Minister said: “The Consultation Paper seeks views on proposed reforms to the corporations and tax laws to deter and disrupt the core behaviours of phoenix operators, while minimising any unintended impacts on legitimate businesses and honest restructuring. The Minister said the proposed changes are intended to assist regulators to better target action against those who repeatedly misuse corporate structures and enable them to take stronger action against those entities and individuals.”

The Consultation Paper, explains the source and object of the possible measures as follows:

“This Consultation Paper seeks feedback on a number of law reform proposals which are based on recommendations made by the Government’s Phoenix and Black Economy Taskforces. The aim of the reforms is to deter and disrupt illegal phoenix activity and remove the unfair competitive advantage that flows from this, while minimising any unintended impacts on legitimate businesses and honest restructuring.”

The ‘Table of Contents’ for the Consultation Paper is set out below. It includes PART ONE recommendations which would impact the entire corporate and taxation framework and PART TWO proposals which would be tightly targeted at only those involved in the most egregious phoenix activity.

The PART ONE Proposals (affecting everyone) include the following.

1. That there be a single “phoenix hotline” where intelligence can be obtained from the public and shared with all members of the Phoenix Taskforce.
2. Establishing a specific phoenix offence. It is proposed to amend the Corporations Act 2001 to specifically prohibit the transfer of property to defeat creditors – perhaps borrowing from similar provisions in s121 of the Bankruptcy Act which allows recovery of property transferred to defeat creditors.
3. Extending remedies to allow recovery of property transferred in those circumstances, wider rights to compensation and civil and criminal penalties.
4. Preventing directors back dating their resignation date by creating a rebuttable presumption that they were still a director up to the date of lodgement of the form (where the form is lodged more than 28 days after the alleged retirement.
5. Avoid companies being abandoned’ by limiting the right of a sole director resign from office without either first finding a replacement director or winding up the company’s affairs. This would be done by amending the Corporations Act to deem such a resignation ineffective.
6. Restrict the rights of ‘related creditors’ to vote at creditors meetings, so that they can’t stack the meeting and frustrate the right of the unrelated creditors to make important decisions, including replacing the external administrator, if that administrator does not have the confidence of those creditors.
7. Expand the current ‘Promoter Penalties’ regime from just ‘tax exploitation schemes’ to include illegal phoenix activity. This would allow proactive disruption of that activity and a wider range of persons who could be tackled.
8. Extend the ‘Directors Penalty Notice’ (DPN) regime to unpaid GST. This would make all directors personally liable for unpaid GST. This regime is very effective but really does ‘pierce the corporate veil’ of limited liability.
9. Allow the ATO’s power to garnishee amounts due to the taxpayer, by third parties, not only for existing tax liabilities but also to provide the money for (or to contribute to) Security Deposits that the ATO might demand under existing collections law. This effectively extends the ATO’s power to garnishee to expected (not just existing) tax liabilities, as the security deposits can be required for expected liabilities.

PART TWO proposals (targeted at high risk entities) include the following.

1. There is a proposal to identify High Risk Entities (HRE) by some objective marker events and then allow the Commissioner of Taxation to designate them an HRE Operator, which would be the trigger for the remaining measures. Designation as such an ‘Operator’ would be appealable (but the triggered measures would still apply in the interim).
2. There is a proposal that an HRE Operator would have to pick the next liquidator on a ‘cab rank’ (that would have to be created) or appoint an a Government liquidator. This is to avoid them selecting a possibly compliant or facilitatory liquidator.
3. The 21 days normally accorded to directors, to pay their DPN liabilities, be abridged to a nil period, for HRE Operators, so as to give them no time to start shedding assets. It strikes me that the Bankruptcy Act would allow such dispositions to be clawed back but that takes time and this way the ATO could be taking immediate action (including getting asset freezing orders).
4. Extend the ATO’s power to refuse to refund amounts due, if the taxpayer is an HRE Operator and there is an outstanding lodgement.

[Minister’s website: media release; Treasury website: Consultation Paper; FJM; LTN 186, 28/9/17; TM Sept 2017]

Consultation Paper – Table of Contents