ATO’s phoenix crackdown

So-called “phoenix” activities have been around for quite awhile. They arise when a business is deliberately liquidated in order to avoid the payment of tax liabilities, wages, superannuation and leave entitlements and other responsibilities, such as supplier accounts. The business then continues, free of liabilities, in the form of another corporate entity, controlled by the same person or group of individuals.

We’ve all heard of instances where this has happened and the subsequent dogfight (often unsuccessful) to recover those liabilities. And SMEs, often as suppliers to other businesses, can be caught in the crossfire when a “phoenix” entity goes out of business, owing them for goods they have supplied.

The Government recognises the problem, including the fact that it is costing it around $600 million annually in lost revenue. The activity has been prevalent in the building and construction industry, hospitality and cleaning services, but is spreading into other sectors. The ATO has seen cases where property developers claim GST input tax credits upfront on acquisitions made from related entities, while the entity with the GST liability subsequently liquidates and the liability goes unpaid.

Needless to say, the Government wants to stamp out the practice.

It plans to do this by looking at changes to the tax law and the corporations law. Possible changes the Government will consider include:

• Changing the law so that company directors engaged in fraudulent phoenix activity cannot avoid personal liability for paying tax that is owed and super payments for employees by placing the company into voluntary administration or liquidating the company.
• Company directors are already subject to tax laws that can make them liable if the company’s tax liabilities go unpaid. However, the Government is considering expanding the director penalty regime to apply to superannuation guarantee liabilities (ie. super payments for employees) and other taxation liabilities such as indirect tax liabilities and a company’s own income tax liability.
• Extending the anti-avoidance provisions in the tax law to give the Tax Commissioner specific power over phoenix-type activities – there could be a specific description of phoenix-type activity in the law. The aim is to ensure there are anti-avoidance provisions in the taxation law to effectively negate any taxation benefit derived from fraudulent phoenix activity.
• Reinstate the “failure to remit” offence under the tax law – this would mean reintroducing a provision that would make it an offence for an entity not to remit the required Pay-As-You-Go Withholding (PAYGW) amounts.
• Deny directors of companies (and potentially close relatives) from being able to access PAYGW credits in relation to their own income where amounts withheld have not been remitted to the ATO by the company.
• Introduce an offence for claiming non-remitted PAYGW credits. Under this change, it would be an offence for directors to claim credits in relation to their own income for PAYGW amounts that have not been remitted to the ATO by the company of which they are a director.
• Stopping a company reusing the same or similar name that it’s just used when it collapsed. Directors could be made personally liable for the debts of a liquidated company in circumstances where a “new” company adopts the same or similar name as its previous incarnation.
• If someone has a previous record of phoenix-like activity, they would have to pay some tax up front (ie. effectively, a bond) before they can activate the business through the company structure. That is, the law would be changed to provide the Tax Commissioner with the discretion to require a company to provide an appropriate bond (supported by sufficient penalties) where it is reasonable to expect the company would be unable to meet its tax obligations and/or engage in fraudulent phoenix activity.
• Give a court or ASIC a discretion to disqualify a person from being a director if the relevant company has been wound up and the conduct of the person, as a director of that company, makes them unfit to be concerned in the management of a company. It is noted that ASIC has already established what it calls Project Phoenix to look at disqualified directors with a history of corporate failures.

The Assistant Treasurer said the problem is a serious one, and he was “utterly determined” and prepared to “wear some flak” on this issue in order to protect employees’ entitlements and also legitimate businesses who lose out when not paid for their supplies. It is understood the Government is keen to bring legislation forward this year to make the changes.

It is not uncommon for SMEs to be out of pocket when one of their customers goes out of business. That is a fact of business life. But, when the loss is caused by “phoenix” activity, it’s that much harder to stomach. SMEs should keep a watch on what the Government ends up doing about this problem.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.

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