Under new laws proposed by the Turnbull Government, each Australian Company Director will be assigned a unique Director Identification Number to crack down on illegal phoenix activity which is said to the cost as much as $3.2 billion each year.
The changes were implemented as result of the recommendations from the Productivity Commission’s Business Set-up, Transfer and Closure inquiry final report in December 2015.
What is Phoenix Activity?
Phoenix activity involves setting up or establishing a new company which takes over the failed or insolvent business of a predecessor company. It involves the rebirthing of the same company which has become insolvent, under a new name, sometimes with the same assets owned by the former company, minus all the liabilities of the former company.
Phoenix activity doesn’t always involve fraudulent or illegal activity, as the winding up and liquidation of a company that has genuinely failed is a legitimate use of a company. Directors are able to set up new companies undertaking the same or a similar business.
The limited liability of a company and the ‘corporate veil’ generally protects directors and shareholders from personal liability for the failed company’s debts. In many instances, through no fault of the directors or management, a company may be unable to pay its debts.
What is illegal Phoenix Activity?
On the other hand, illegal phoenix activity generally involves a deliberate and fraudulent attempt by directors to avoid paying the company’s creditors. When the company becomes insolvent or is about the become insolvent, the directors will transfer the assets of the failing company to another related company that they also control for little or no consideration for the assets, before handing the company over to the failed company’s liquidators.
The effect of this is that sometimes employees, creditors and Australian Taxation (ATO) Office are left unpaid and without any chance of recovering the money from the insolvent company, while the directors set up similar companies without any ramifications.
The Sydney Morning Herald last month reported that ASIC has identified nearly 11,500 potential phoenix operations, with the ATO telling the Senate enquiry that as many as 20,000 companies may be building their wealth through ‘fraudulent phoenix behaviours”.
How will the new changes limit Phoenix Activity?
The Director Identification Number is said to enable directors to be tracked through other government agencies and databases and assist in mapping their relationships to other companies and people.
If you are suspected of operating a phoenix company, you will now be required to hand to the ATO a security deposit before setting up a new company that can be used to recover any tax debts, if you were to incur any, and the ATO will be able to withhold tax refunds from companies from directors who have a history of past phoenix activity.
The ATO will be able to immediately commence recovery action after issuing a Director Penalty Notice, and directors will be unable to backdate their resignations and will be prevented from resigning where it leaves the company with no directors.
Directors will also be personally liable for GST if they are suspected of operating a phoenix company, and related entities will be prohibited from appointing a liquidator over companies whose directors have a history of phoenix activity.
Interestingly enough, the ATO itself was involved in their own phoenix scandal earlier this year when it was reported by the Sydney Morning Herald that Michael Cranston, the Deputy Commissioner whose role was to raid suspected phoenix companies, was caught on tape telling his son how to avoid being prosecuted for tax fraud.
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