New push to stamp out illegal phoenix activity in Australia

This article was current at the time of publication.

Industry experts and peak bodies agree that accountants have a crucial role to play as the Australian government ushers in tough new laws to stamp out illegal phoenix activity.

The accounting industry is at the frontline because it can often see evidence of irregular business trading before regulatory watchdogs catch on.

Of the 2.3 million businesses actively trading in Australia in June 2018, 287,500 went to the wall, up 11,500 on the previous year, according to Australian Bureau of Statistics figures. This creates scope and incentive for rogue business owners to try to circumvent the law.

What is illegal phoenix activity?

The Australian Taxation Office (ATO) defines illegal phoenix activity as “when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements”.

Sometimes referred to as fraudulent phoenix behaviour, it is distinct from standard phoenix activity where corporate structures are replaced for legitimate business purposes.

ATO Assistant Commissioner Aislinn Walwyn says while some view tax crime as victimless, that couldn’t be further from the truth.

“Illegal phoenix activity is a serious threat to the integrity of the tax and superannuation system and costs the community billions of dollars every year,” Walwyn says.

According to the ATO, illegal phoenix activity is particularly rife in big cities in the building and construction, labour hire, payroll services, and security industries. It is also prevalent in regional Australia in sectors such as mining, agriculture, horticulture, and transport.

ATO Deputy Commissioner Will Day confirms its devastating impact on the general community, businesses, employees and contractors.

“We have developed sophisticated data matching tools to identify, manage and monitor suspected illegal phoenix operators,” Day says.

“We support businesses who want to do the right thing and will deal firmly with those who choose to engage in illegal phoenix behaviour”.

However, he concedes that “investigation of illegal phoenix activity is complex and time-consuming. Civil and criminal matters typically take many years to finalise”.

Stamping out illegal phoenixing

In July 2018, the ATO released a report entitled The Economic Impacts of Potential Illegal Phoenix Activity, which revealed the total direct cost of illegal phoenix activity is between $2.85 billion and $5.13 billion.

The government’s proposed new laws, which could expose company directors to jail terms of up to 10 years for engaging in illegal phoenix activities, are contained in the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019.

Meanwhile, the Inter-Agency Phoenix Taskforce continues its efforts to eradicate misconduct. The phoenix taskforce comprises more than 30 state and federal government entities, working together to share and match data to identify and take enforcement action against suspected illegal phoenix operators.

It has developed strategies to process and address illegal phoenixing activities, with some success, although most strategies haven't been in place long enough to have a significant impact. Even so, slowly but surely, the tide is turning.

The ATO recently announced it has collected more than $500 million as a result of audits of illegal phoenix operators since the Phoenix Taskforce launched in late 2014, followed by the Serious Financial Crimes and Black Economy Taskforces in 2015 and 2016, respectively. But there's still a long way to go, as these figures showing the direct impact on those bearing the brunt of the problematic behaviour show:

• business: Unpaid trade creditors: $1.162 billion – $3.171 billion
• employees: Unpaid entitlements: $31 million – $298 million
• government: Unpaid taxes and compliance costs: $1.66 billion.

Phoenix operator sentenced to jail

In a case the ATO describes as “classic illegal phoenix behaviour”, a luxury property developer was sentenced to six years’ jail by the NSW District Court for large-scale goods and services tax (GST) fraud relating to illegal phoenix activity in the property and construction sector in January this year.

The perpetrator, Benjamin Ensor, was convicted after an ATO investigation found he had structured companies to fraudulently obtain GST credits and failed to report property sales to avoid GST to the tune of $3.4 million.

He was also ordered to pay reparation of more than $1.8 million in what the ATO hopes will warn off potentially like-minded offenders.

CPA Australia weighs in on illegal phoenixing

CPA Australia has been working with the ATO and Australian Securities and Investments Commission (ASIC) on significant law reform in this area.

Dr John Purcell, CPA Australia’s policy adviser for environmental, social and corporate governance, has provided extensive submissions to Treasury to help combat the issue, stating that accounting practitioners are at a pivotal point within the business environment whenever actual or potential illegal phoenix activity becomes evident.

In this respect, there are specific behaviours all accountants should look out for. According to Mackay Goodwin director Grahame Ward, key indicators could include:

• a failed entity that appears undercapitalised and trading while insolvent is not meeting debts
• disputes or litigations with suppliers or other third-party creditors that cannot be met
• a new entity is being formed with only nominal share capital
• directors of the failed company are the same in the new entity, or could be deemed related, shadow or de facto directors’ assets from a failed company are transferred at below market value to a successful company – this could include goodwill or intellectual property
• employees of a failed company are re-employed by a successful company
• a failed company makes preferential payments to key creditors of a new company
• a successful company is trading with the same customers, name, intellectual property or from the same premises
• a successful company starts trading within 12 months of the failed entity.

The hotline to report suspected illegal phoenix behaviour is 1800 807 875. You can also report suspicious activities to the ATO by completing a form.