Tackling phoenix activity: An overview of the latest reforms

Despite all the changes introduced to date, illegal phoenix activity remains a pressing issue.

According to a 2018 Pricewaterhouse Cooper report commissioned by the Government, the estimated annual cost to the Australian economy is $5.19 billion – a figure which is leaving employees unpaid, business in debt and taxes owing.

In the Coalition’s efforts to tackle it, a new package of reforms was introduced into Parliament on February 13 that gives regulators new powers. Here we take a brief look at what has been proposed.

Tackling phoenix activity to date

When it comes to tackling illegal phoenix activity, the Government’s message has been consistent and clear. Create a new company to continue the business of a deliberately liquidated one and you will be caught out and face the consequences.

Some of the actions the Government has taken so far include:

  • Providing additional funding of $8.7 million over four years to the Asset-less Administration Fund (AAF) (from 2018/19)
  • Setting up the Phoenix, Black Economy and Serious Financial Crime Taskforces
  • Introducing legislation to reverse charge GST in relation to gold trading and the sale of new residential premises (March 2018)
  • Launching a new Phoenix Hotline to make it easier to report phoenix activity to the ATO so they can investigate it (July 2018)
  • Releasing draft legislation that requires all company directors to apply for a Director Identification Number (DIN). (January 2019)

This latest package of reforms, which affect both corporation and tax law, is the next step in bringing this bird, and the people responsible for it, down.

The new proposed reforms in brief

According to a release by the Treasury, this new legislation – the ‘Treasury Laws Amendment (Combating Illegal Phoenix Activity) Bill 2019′ – is intended to deter and disrupt the key behaviours of phoenix operators by:

  • Strengthening enforcement options against those who conduct and facilitate phoenix activity with the introduction of new phoenix offences and civil penalty provisions. These will carry the highest penalties available under the law.
  • Limiting the ability of directors to resign when doing so would mean leaving the company as an empty corporate shell with no directors.
  • Giving the Australian Securities and Investments Commission a new recovery power and extending the recovery provisions available to liquidators to assist the recovery of lost assets for the benefit of employees and other creditors.
  • Preventing directors for falsely backdating resignations in order to avoid liability or prosecution
  • Extending the director penalty provisions to make directors personally liable for their company’s GST and related liabilities
  • Expanding the ATO’s power to retain refunds where there are outstanding tax lodgements.

Safeguarding honest businesses and creditors

The overall purpose of this new legislation is to target those who engage in phoenix activity and take advantage of the corporate structure to avoid paying taxes, creditors and employee entitlements such as redundancy, notice and final pay.

However, in order to protect honest businesses and those who are making genuine attempts to rescue a distressed business, including directors and insolvency specialists, the new phoenix laws incorporate a number of safeguards including: 

  • An extension to the already legislated ‘safe harbour’ for directors of companies in financial distress.
    Amendments to the ‘safe harbour’ to make sure that important provisions continue to operate as intended and promote business restructure and turnaround.
  • In addition to this legislation, the Government has also amended the Insolvency Practice Rules to restrict the voting rights of certain creditors related to a phoenix company to ensure the interests of honest creditors aren’t compromised.

In addition to this legislation, the Government has also amended the Insolvency Practice Rules to restrict the voting rights of certain creditors related to a phoenix company to ensure the interests of honest creditors aren’t compromised.

These new reforms, if passed, are another sign of the Government’s commitment to tackling the huge economic problem that is phoenix activity. Watch this space to see how it plays out and what the impact it has.

If you have a client that is in or heading towards financial distress, get in touch with us today to see how we can help your genuine efforts to turn things around.