ATO taskforce ups the ante on illegal phoenixing

This article was current at the time of publication.

Phoenixing – the practice of companies deliberately going into liquidation to avoid paying their debts, including outstanding taxes, creditors, and often employees – is a massive problem and occurs in every sector.

However, it is particularly prevalent in building and construction, labour hire and payroll services, as well as industries such as security, cleaning, IT consulting, cafes and restaurants, and in regional Australia, across mining, agriculture, horticulture and transport.

The Australian Taxation Office (ATO) estimates the economic impact of illegal phoenixing activities nationally is about $5.1 billion a year.

Unfortunately, that figure is set to grow under the shroud of COVID-19. While the pandemic has spurred a wave of legitimate company liquidations, it is also likely there are many illegal ones.

That’s what the Phoenix Taskforce – comprised of federal, state and territory government agencies, including the ATO and Australian Securities and Investments Commission, Attorney-General's Department – Fair Entitlements Guarantee branch, and Fair Work Ombudsman – is closely monitoring.

The taskforce has nine joint agency operations underway scrutinising activities aimed at exploiting the Australian Government’s economic stimulus measures.

Targeting fraudulent pre-insolvency advisers

Another key area of focus for regulators is “pre-insolvency advisers” and shonky liquidators who are facilitating illegal phoenixing.

“Of most concern to us, and probably most relevant in the context of CPA Australia’s membership, is individuals who promote or facilitate illegal phoenix activity,” says ATO Assistant Commissioner, Integrated Compliance, George Montanez.

“Their activities have the effect of increasing damage to the community and in many cases, they provide bad advice to businesses that would otherwise do the right thing,” Montanez says.

“That impacts reputable, honest advisers who provide sound advice on legal business restructures.”

He says the overwhelming majority of taxpayers do, in fact, do the “right thing”, and that businesses do fail for legitimate reasons.

Further, when a business does fail, and a new business that replaces it also fails, it does not necessarily indicate any illegality.

“Where you stray into illegal phoenixing is when it’s cyclical and happening a lot,” Montanez says. “That’s where the line is crossed.”

Perpetrators of phoenixing can expect swift and strong enforcement action, hefty financial penalties and, based on some recent criminal prosecutions, the prospect of lengthy jail sentences.

Since the Phoenix Taskforce was established in 2014, the ATO has clawed back more than $1.3 billion in liabilities from audits and reviews and returned more than $580 million in cash to the community.

Tracking down illegal phoenixing

Technology is playing a key role in detecting illegal phoenixing.

Authorities are using a range of data capturing sources and increasingly sophisticated analytical techniques to identify transactions that may be the result of phoenixing.

Information sources include business activity statements, PAYG instalments, company and personal income tax returns, and third-party databases.

The ATO also uses the taxable payment reporting system, which requires businesses to report payments to contractors.

From 1 July 2019 to 1 June 2020, the ATO also received 3100 community tip-offs to its Tax Integrity Centre.

“Indicators a company may be participating in fraudulent activities include charging less for services when they keep on changing their company names – sometimes by just a word or a letter – and have liquidated one and started another when they are not making PAYG and superannuation payments, and a lot of times the earnings and lifestyles of the directors do not match,” Montanez says.

The ATO can begin audits, impose liabilities, take debt recovery, bankruptcy and insolvency actions through the courts, make directors personally liable for company debts, and refer matters for a criminal prosecution, including to the Serious Financial Crimes Taskforce.

Director identification numbers as a deterrent

The recent passage of legislation to introduce a Director Identification Number (DIN) regime will also be a major deterrent.

The DIN will be a unique number for each company director, requiring individuals to register and provide proof of identification, removing the ability to use fictitious director names.

Dean of Melbourne Business School and co-dean of the University of Melbourne’s Faculty of Business and Economics, Professor Ian Harper, is one of several university researchers who have investigated phoenixing activity and provided recommendations to the federal government.

Harper commends the stronger enforcement actions and  introducing the DIN.

“But to some degree, there is a bit of wait-and-see, because the incentives are very strong to engage in it,” he says, adding that issues needing further consideration include regulating pre-insolvency advisers giving illegal and misleading advice.

“It’s never been more important given the current state for companies in financial difficulties to be getting high quality independent advice, but some haven’t lived up to the right standards,” he says.