Pheonix Companies - Part 1
Fraudulent Phoenix Activity
Fraudulent phoenix activity involves the accumulation of debts in a corporate structure and the liquidation of that company to avoid liability for those debts. Because of the variety of structures that phoenix activity can take and the need to protect entrepreneurialism, fraudulent phoenix activity is inherently difficult to define. However, underlying the distinction between illegitimate, or fraudulent, phoenix activity and a legitimate use of the corporate form is the intention for which the activity is undertaken.
Historically, fraudulent phoenix activity has been most prevalent with small business (businesses with a turnover below or around $2 million), however, in recent years fraudulent phoenix activities have been undertaken by much larger businesses and by individuals who already have significant levels of wealth. As a consequence, the Commonwealth government has become increasingly aware of phoenix activity spreading to a wider range of businesses and industries. The federal government has indicated its concern about an increase in the numbers of individuals promoting the benefits of fraudulent phoenix activity over the last decade or so.
The cost of phoenix activity on the public is significant with many employees losing their entitlements, government losing out on tax revenue and the wider economy been undermined. Although it is difficult to measure precisely the cost of fraudulent phoenix activity, the Australian Taxation Office estimates that the current stock of phoenix activity that it is monitoring poses a risk to tax revenue of around $600 million. Previously, in 1996 the Australian Securities Commission (now ASIC) estimated the annual loss to the Australian economy due to phoenix activity at between $670 million to $1.3 billion.
Objective of new laws
On 24 May 2012, the Commonwealth government introduced the Tax Laws Amendment (2012 Measures No.2) Bill 2012 (the Bill) into Federal Parliament. The Bill was reviewed and passed by the Senate on 27 June 2012 and assented on 29 June 2012.
According to the Explanatory Memorandum of the Bill, the objective of the new laws is to reduce the incentives for company directors to allow their companies to engage in fraudulent phoenix activity and reduce the impact of fraudulent phoenix activity on the community. In addition, the reforms aim to better protect workers’ entitlements to superannuation.
The amendments attempt to ensure that there are sufficient deterrents in the tax law to discourage directors from undertaking fraudulent phoenix activity with the intention of the company avoiding its tax and superannuation obligations or avoiding the company’s obligations to creditors more generally.
The new laws have been enacted to reduce the scope for companies to engage in fraudulent phoenix activity or escape liabilities and payments of employee entitlements by:
- extending the director penalty regime to make directors personally liable for their company’s unpaid superannuation guarantee amounts;
- ensuring that directors cannot discharge their director penalties by placing their company into administration or liquidation when PAYG withholding or superannuation guarantee remains unpaid and unreported three months after the due date; and
- in some instances, making directors and their associates liable to PAYG withholding non-compliance tax where the company has failed to pay amounts withheld to the Commissioner of Taxation (Commissioner).
If you need legal advice, contact the friendly team at Dooley & Associates.Back