What is fraudulent phoenix activity?
Fraudulent phoenix activity involves the evasion of tax and other liabilities such as employee entitlements.

In its basic form it involves a company accumulating debts, the controllers stripping the assets from the company and then liquidating the company to avoid paying the debts.

The same business is then resumed (reappearing like the mythical bird, the phoenix) in a new company that is controlled by the same parties. This new company is free of the previous debts and liabilities.

The creditors (most usually including the Australian Taxation Office) are left ‘out of pocket.’

The current position
The Australian Taxation Office believes that fraudulent phoenix activity is on the rise because of the recent economic down turn.

The existing measures have done little to curb fraudulent phoenix activity. The existing measures are narrowly focused on unpaid Pay-As-You-Go Withholding (PAYGW) on salary and wages.

Under the director penalty regime, the Commissioner of Taxation can effectively make a company director personally liable for a company’s unpaid PAYGW by issuing a director penalty notice. This notice requires the directors of the company to pay the outstanding PAYGW or place the company into liquidation or administration within 21 days. Failure to pay the amount within that 21 days or place the company into liquidation or administration within that time renders the directors liable for a penalty equal to the unpaid tax.

Other tax liabilities such as income tax, superannuation guarantee and GST are not covered by the existing measures.

The proposed new rules
The Government proposes to strengthen the law to discourage and penalise fraudulent phoenix activity.

The proposed measures are:
  • the director penalty regime will be extended to superannuation guarantee amounts

  • directors will be made personally liable for their company’s failure to pay employee superannuation

  • the Australian Tax Office will be given the power to commence recovery against directors under the director penalty regime, without providing a 21 day grace period, for certain unpaid company liabilities that remain unreported after three months of becoming due; and

  • in certain circumstances directors and associates of directors will be prevented from obtaining credits for withheld amounts in their individual tax returns where the company has failed to pay withheld amounts to the Australian Tax Office.

How these provisions will apply and interact with other insolvency provisions is unclear. Could directors of insolvent or struggling companies be exposed to company debts or other penalties which they were previously protected from? In particular how will unintended outcomes be distinguished from contrived and deliberate avoidance?

It is not clear how far the proposed reduced grace period will extend to other taxes, for example income tax and GST. Also, presumably, the credits to be denied are for PAYGW but could they apply to other amounts? The circumstance in which the credits will be denied is not clear.

We wait with interest the precise wording of the proposed amendments.

Please contact your Moore Stephens relationship partner for a detailed explanation of how any of these matters may apply to you


Contact

Syd Jenkins
T +61 8 9225 5355
sjenkins@moorestephens.com.au

www.moorestephens.com.au