In the 2018 Federal Budget, the Government announced it will reform the corporations and tax laws and provide the regulators with additional tools to assist them to deter and disrupt illegal phoenix activity.
Illegal phoenixing involves the deliberate misuse of the corporate form by allowing a company to run up debts, the company does not pay (mostly, deliberately), then the owners abandon the company, and start a new one, to do the same thing (hence the name: the ‘phoenix [new company] rising from the ashes’). It is most notoriously associated with ‘labour hire’ companies, which don’t remit PAYG withheld from employee’s wages (causing the ATO loss) and, which don’t pay employee entitlements (costing the employees). The ATO has also encountered developers not paying the GST on sales, of property, and then, liquidating the company.
The package includes reforms to:
- introduce new phoenix offences to target those who conduct or facilitate illegal phoenixing;
- prevent directors improperly backdating resignations to avoid liability or prosecution (though, often the real owners employ ‘men of straw’ to act as the directors and shareholders);
- limit the ability of directors to resign when this would leave the company with no directors;
- restrict the ability of related creditors to vote on the appointment, removal or replacement of an external administrator;
- extend the Director Penalty Notice (DPN) Regime to GST (see related TT article), luxury car tax and wine equalisation tax, making directors personally liable for the company’s debts; and
- expand the ATO’s power to retain refunds where there are outstanding tax lodgements.
The reforms to combat illegal phoenixing complement and build on the work of the Government’s Phoenix, Serious Financial Crime and Black Economy taskforces, and other announced reforms such as a Director Identification Number, a combined black economy and illegal phoenixing hotline, and reforms to address corporate misuse of the Fair Entitlements Guarantee and to tackle non-payment of the Superannuation Guarantee Charge.
[Treasury website: Budget Paper, Part 1 – Revenue Measures, p37; Tax Month May 2018]
Study questions (answers available)
- Will the measure include creating new ‘phoenix’ offences?
- Is there a problem with directors backdating resignations, to avoid liability or prosecution?
- Will directors be precluded from resigning, where that leaves no directors?
- Will they restrict all directors vote on the appointment, removal or replacement of an external administrator?
- Will directors be mad personally liable, by extending the DPN regime to GST?
- Is the new aspect, of allowing the Commissioner to retain refunds, allowing him to do so when there are outstanding tax returns?
