Action Against Fraudulent Phoenix Activity
The Empire Strikes Back…
In a capital city far, far away, Treasury has been working on a proposal to address the level of corporate Phoenix activity, which has increased significantly during the global financial crisis…
…Treasury’s proposal could have a major impact on the personal liability of company directors. Vantage Performance explains how:
Like the mythical creature which recreated itself through fire, rising from the ashes to live again, Phoenix companies are commercial entities which have emerged from the collapse of another company. The new company, with a similar name, is set up to undertake the same activities as the previous company, thereby presenting the appearance of ‘business as usual’ to its customers.
The primary objective in engaging in Phoenix activities is to evade taxation and other liabilities (often employee entitlements). The liabilities evaded through Phoenix activities can be considerable, and therefore provide significant incentives for the creation of sophisticated avoidance strategies. The Australian Taxation Office estimates that the suspected Phoenix cases currently under review equate to approximately $600 million in unremitted taxes, with ASIC estimating annual costs to be around $670 million to $1.3 billion.
Despite existing taxation legislation and the Corporations Act (2001) containing a number of deterrents, Treasury believes that Phoenix activities are increasing, particularly due to liquidity constraints associated with the Global Financial Crisis. Treasury recently issued its “Action Against Fraudulent Phoenix Activity” proposals paper for public comment.
The impact of the proposed changes on directors is substantial and we believe particular attention should be given to the following elements:
- Replacement of the Director Penalty Notice (DPN) with an automatic penalty and personal attachment of the liability to the directors upon the expiration of 3 months following the due date for payment of the statutory liabilities.
- Directors will also be personally liable for outstanding superannuation, GST, excise and income tax, and not just PAYG which is currently the case.
- Reinstatement of the ‘failure to remit’ offence. This will empower the Commissioner to take action against directors for outstanding income tax, and may go so far as enabling the Commissioner to seize assets of directors. Treasury is also considering introducing similar provisions in relation to superannuation guarantee and other tax liabilities.
- The current taxation legislation enables the Commissioner to seek a bond against anticipated income tax liabilities from a director where he considers there is a risk of Phoenix activity. Treasury proposes to expand this provision to include other liabilities, and to significantly increase the penalty for failing to provide a bond.
As a result of these proposed sweeping changes two schools of thought have emerged as to the likely impact on insolvency numbers:
1) The changes will result in an increase in voluntary administrations and creditors’ voluntary liquidations as directors choose to protect their personal asset position rather than push on in an attempt to turn their business around, because if the turnaround doesn’t succeed they may have a substantially higher level of personally guaranteed creditors to deal with.
2) The changes will stimulate early intervention to address the underlying causes of underperformance, fostering turnaround activity and reducing the number of insolvencies in the longer term. We subscribe to this view, as many directors have existing personal guarantees and the introduction of these provisions will incentivise those directors to seek professional advice sooner.
Either way, Treasury will need to balance the severity of the additional deterrents with the need to ensure that innocent directors and companies are not captured through honest mistakes. Treasury will also need to undertake an education program to ensure businesses are not destroyed by being placed into insolvency administration through fear of personal asset seizure. If this is not done, it will be more difficult to find experienced individuals to act as directors.
For more information please contact one of the team at Vantage Performance.