The Turnbull government recently took some long-anticipated action to clamp down on illegal phoenix activity – and it’s been welcomed by many.

These reforms will go a long way to deterring the unethical behaviour of some advisers and directors taking advantage of the system – and they might just save you as a business owner from making a decision you regret.

Some directors or shadow directors and their advisers have exploited the system for far too long and have deliberately avoided liabilities with illegal phoenix activity.

The reforms represent a good opportunity for business turnarounds to regain integrity, with the restructuring and insolvency sector able to ensure that the process is transparent and legitimate.

What is illegal phoenix activity and why is it a problem?

Phoenixing is the stripping and transferring of assets from one company to another by individuals or entities in order to avoid paying liabilities.

Phoenix activity costs the Australian economy up to $3.2 billion per year and has been a problem for successive governments over many decades.

It hurts all Australians, including employees, creditors, competing businesses and taxpayers.

That’s why the Minister for Revenue and Financial Services, the Hon. Kelly O’Dwyer MP, recently announced a comprehensive package that ensures that those involved in illegal phoenix activity face tougher penalties. This is what he said:

“The Turnbull Government is committed to ensuring individuals who engage in illegal phoenixing activity are held to account and that the regulators are equipped to take stronger action to both deter and penalise phoenixing activity for the benefit of all Australians ”

How is the ATO clamping down on illegal phoenix activity?

The government’s reforms include the introduction of a Director
Identification Number (DIN) and a range of other measures to both deter and penalise illegal phoenix activity.

The DIN will identify directors with a unique number but it will be much more than just a number. It will interface with other government agencies and databases to allow regulators to map the relationships between individuals and entities and individuals and other people.

In addition to the DIN, the government will consult on implementing a range of other measures to deter and disrupt the core behaviours of phoenix operators, including non-directors such as facilitators and advisers.

These measures will include:

  • Defining specific phoenixing offences to better enable regulators to take decisive action against those who engage in this illegal activity;
  • The establishment of a dedicated phoenix hotline to provide the public with a single point of contact for reporting illegal phoenix activity;
  • The extension of the penalties that apply to those who promote tax avoidance schemes to capture advisers who assist phoenix operators;
  • Stronger powers for the ATO to recover a security deposit from suspected phoenix operators, which can be used to cover outstanding tax liabilities, should they arise;
  • Making directors personally liable for GST liabilities as part of extended director penalty provisions;
  • Preventing directors from backdating their resignations to avoid personal liability or from resigning and leaving a company with no directors; and
  • Prohibiting related entities to the phoenix operator from appointing a liquidator.

The government will also consult on how best to identify high-risk individuals who will be subject to new preventative and early intervention tools, including:

  • A next-cab-off-the-rank system for appointing liquidators;
  • Allowing the ATO to retain tax refunds; and
  • Allowing the ATO to commence immediate recovery action following the issuance of a Director Penalty Notice.

Consultation on the non-DIN measures will commence in the coming weeks.

Other existing action to deter illegal phoenix activity

These reforms complement and build on other government action to combat crime and fraud in the
economy, including:

  • Instituting the Phoenix, Black Economy and Serious Financial Crime Taskforces;
  • Strengthening disciplinary rules for insolvency practitioners;
  • Legislating to improve information-sharing between key regulatory agencies;
  • Reviewing and enhancing ASIC’s powers and enforcement tools;
  • Consulting on law reform initiatives to curb the excessive drain on the taxpayer funded Fair
    Entitlement Guarantee scheme, which covers employees’ entitlements left outstanding as a result of failed business enterprises;
  • Improving the collection of GST on property transactions from 1 July 2018; and
  • Consulting on a register of beneficial ownership of companies to be made available to key regulators for enforcement purposes.

Find the right turnaround advisor…

Let’s face it, it’s inevitable that some businesses will fail and there are often genuine reasons why this happens. If a director has managed a company responsibly and it fails, there should be the opportunity to have another go.

Sometimes, phoenixing is wrongly portrayed as the ‘only’ option to unsuspecting directors. The new reforms will help prevent this from happening as it now becomes a much riskier option.

Make sure you get advice from a qualified turnaround, restructuring and insolvency expert. Watch our video on how to choose the right advisor in three easy steps: http://rapseygriffiths.com.au/choosing-the-right-insolvency-adviser.