By Brett Martin, Assistant Commissioner Tax Evasion & Crime, Australian Taxation Office.
In my role as Assistant Commissioner Tax Evasion & Crime, one of my key focus areas is stamping out illegal phoenix activity. This type of egregious behaviour robs the Australian community of vital funds, casts shadows on legitimate businesses, and takes its toll on individuals. As such, I am passionate about making a positive difference in this space.
Phoenix activity is the evasion of tax and other liabilities, such as employee entitlements, through the deliberate, systematic and sometimes cyclic liquidation of related corporate trading entities.
The nature of Phoenix activity can cover activities which range from legitimate business rescue activities through to those deliberately using serial insolvency as a business model to engage in illegal activity such as avoiding debts, false invoicing and money laundering.
The Behavioural Continuum below shows the sliding scale on which phoenix activity occurs. It ranges from commercial necessity, where a business is rescued legitimately, through to the illegal end where phoenix is used as a wealth creation strategy.
It's important to understand that occasionally the need to phoenix may arise out of events outside a business owner's control – such as a loss of key customers. Business rescue is a legitimate use of the corporate form and we will work with those in this category to provide education and advice.
We characterise this as generally a single phoenix event, over a long period of time.
Problematic phoenix is still considered legitimate, but it is detrimental to society. Generally, this is usually seen as two to three phoenix events over a relatively short period of time with the business owners viewing phoenixing as a way out of a problem. We work with this group to ensure that their behaviour does not become the norm and that they do not move to an illegal phoenix business model.
Illegal phoenixing occurs when the controllers of a company deliberately avoid paying liabilities by shutting down an indebted company and transferring its assets to another company. Often, that company is then used to conduct the same type of business. This impacts creditors, government through lost revenue, and employees through lost wages and superannuation entitlements.
In addition, there are a number of detrimental effects illegal phoenix activity has on the Australian community:
• Illegal phoenix operators don't factor the cost of taxes and super into their pricing structures which gives them an unfair competitive advantage
• By not meeting their financial obligations, illegal phoenix operators can have devastating effects on innocent businesses and individuals, employees and sub-contractors
• Illegal phoenix operators and their advisors understand the challenges within government systems and actively seek to exploit them at every opportunity
• Community confidence is eroded by illegal phoenix operators, often because they maintain a personal lifestyle that does not match their income
The ATO is a member of the Phoenix Taskforce which looks at all facets of the Behavioural Continuum, but is particularly concerned with illegal activity.
The Phoenix Taskforce comprises over 20 Federal, State and Territory government agencies, including the ATO, Australian Securities & Investments Commission (ASIC), Department of Employment, and the Fair Work Ombudsman. The Phoenix Taskforce provides a whole-of-government approach to combatting illegal phoenix activity.
As a group, we have developed sophisticated data matching tools to identify, manage and monitor suspected illegal phoenix operators. We support businesses who want to do the right thing and will deal firmly with those who choose to engage in illegal phoenix behaviour.
We work collectively to identify those who are undertaking this illegal activity. Our strategies are tailored to differentiate between those who pose a high, medium and low risk.
Higher risk groups can expect strong scrutiny and if found to be engaging in illegal phoenix activity they will experience the full force of the law.
Medium risk operators can expect a range of engagement activities that strongly encourage compliance with the law.
We acknowledge that many who fall within our low risk category are undertaking legitimate business-rescue activities. We work with those in this category to provide education and advice on how not to fall foul of the law.
What's being done about illegal phoenix activity
The Government is considering a comprehensive package of reforms to address illegal phoenixing including:
• Director Identification Numbers
• Phoenix Hotline (for the public to better report suspected phoenix activity)
• Enhancing ASIC's powers around the liquidation process and the ATO's powers around director penalties and security deposits.
• Targeting of advisors who promote or facilitate phoenix activity through expanding the promoter penalty regime to apply to them.
The Government has also consulted on 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 issuing of a Director Penalty Notice.
Transparency of tax debt measure
Announced in the Mid-Year Economic and Fiscal Outlook of 2016-17, and currently awaiting passage of legislation, the transparency of tax debt measure will allow the ATO to disclose tax debt information to credit reporting bureaus of businesses who meet the following reporting criteria: have an ABN; have at least $10,000 of tax debt overdue by at least 90 days; and have not effectively engaged with the ATO to manage their debts.
The intent behind this measure is to support more informed decision making, while reducing unfair advantage and encouraging businesses to engage with us as soon as practicable.
In addition to the reporting criteria, there will be a number of additional safeguards to protect businesses trying to do the right thing. The ATO will undertake a phased approach to implementing this measure, focusing initially on companies and gradually expanding to other entity types.
Tax debts will only be reported when the Transparency of Tax Debt measure passes legislation. There is more information on this measure in a recent webinar available at https://lets-talk.ato.gov.au/ToTD
Illegal phoenix activity is not new. For many years government agencies have applied their respective tools to combat breaches of the law. There have been many solid outcomes, in both civil and criminal penalty terms. But some operators have not been sufficiently deterred. To them we say 'be warned'. The regulatory landscape has changed with the creation of the Phoenix Taskforce and we are working closely together to catch those responsible.
Our strategies will make illegal phoenix activity unviable in a financial sense. We will bring justice to those who persist in ripping off the community. At the same time, our strategies will protect honest Australians and provide a level playing field to support Australia's valued business community.
How to report illegal phoenix activity
If you are aware of, or even suspect illegal phoenix activity, you can report it in any of the following ways:
• by phone on 1800 060 062 (ATO)
• by email to ATO at firstname.lastname@example.org
• via the ATO website https://www.ato.gov.au/Forms/Tax-evasion-reporting-form/
• by phone on 1300 300 630 (ASIC)
• lodge a report of misconduct to ASIC at www.asic.gov.au
For more info, go to ato.gov.au/phoenix
December 2017 - FNSCRD505 - Respond to corporate insolvency situations - FNS51520 Diploma of credit management and FNSCRD401 - Assess credit applications and BSBRSK501 - Managing Risk