ATO Update: Deliberate liquidation: Tale of the illegal phoenix

Illegal phoenix activity is a wicked problem that has a significant impact on the Australian economy; estimated to cost as much as $5 billion each year, with much of that impact borne by other honest businesses and employees. At its core, illegal phoenix activity is the deliberate and repeated shutdown of a business to avoid its debts (such as employee entitlements, supplier invoices, or tax obligations) only to resume operation under a new company or entity.

The Australian Taxation Office (ATO) leads the Phoenix Taskforce – 37 federal, state and territory government agencies who have come together to detect, disrupt, and deter illegal phoenix operators.

Strengthening the Taskforce

As part of the ongoing fight against illegal phoenix activity, the Australian Government has allocated an additional $58.7 million and $4.7 million in funding to the ATO and ASIC respectively over the next four years.

The Phoenix Taskforce takes a coordinated and strategic approach to dealing with illegal phoenix activity. In the ATO we try to influence lower risk groups to return to the tax system, while we take a more intensive compliance approach against higher risk phoenix groups and their facilitators. Strategies include early intervention work targeting specific industries, and working with key supply chain entities to close off potential opportunities. Through marketing and communications activities, we’re also warning at-risk employees and businesses about the warning signs of illegal phoenix operators, and what they can do to take action.

From the Taskforce’s establishment in 2014 up until 31 December 2019, the ATO has raised more than $1.29 billion in liabilities from audits and reviews of illegal phoenix activity, and returned more than $560 million in cash to the community.

In 2018-19 we completed more than 750 audits and reviews across a range of industries and locations. The Phoenix Taskforce also recorded nine criminal convictions in this period, and banned and disqualified 30 directors from being involved in the management of a corporation.

Case study:

Collaboration between Phoenix Taskforce agencies resulted in a property developer losing his building licence and being disqualified as a company director. The developer had liquidated entities six times in five years, leaving behind more than $160 million in unpaid debts to creditors. The development group had been subjected to 46 previous ATO compliance activities and owed more than $7 million in current and written-off debt to the ATO alone. The Supreme Court found the man, along with his wife and their associated entities, guilty of falsification of bank statements, appointment of shadow directors, and unauthorised withdrawal of funds. For their dishonest behaviour the taxpayer lost their NSW and Queensland building licences, and were ordered to pay over $9.4 million. As a result, the taxpayer entered into bankruptcy, and was disqualified from being a company director.

Law reform in 2020

A number of upcoming law reforms aim to help combat illegal phoenix activity. The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 introduces:

  • Phoenixing offences targeting property transfers to defeat creditors, extending to people who facilitate illegal asset stripping, such as pre-insolvency advisors, and enhancing recovery of assets by ASIC and liquidators for the benefit of employees and other creditors.
  • Improved accountability of resigning directors, by preventing them from backdating their resignation or abandoning the company as an empty shell to frustrate creditors.
  • Goods and Services Tax (GST), Luxury Car Tax (LCT), and Wine Equalisation Tax (WET)  estimates and director penalties to make phoenix operators personally liable for their company’s GST, LCT, and WET liabilities and prevent them from gaining a competitive advantage over honest businesses that do pay their obligations.
  • Retention of tax refunds where there is non-lodgement to ensure phoenix operators satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.

As part of the new Deregulation Agenda, the Government has also announced the Modernising Business Registers (MBR) Program.

The MBR Program will unify the Australian Business Register (ABR) and 31 registers administered by ASIC on a contemporary, digital registry system. This includes the registers for companies, business names, Australian business numbers (ABNs), and others. The Program will also incorporate the introduction of a Director Identification Number (DIN) – a unique identifier that a director will keep forever. The DIN will prevent the appointment of fictitious directors, and facilitate traceability of a director’s profile and relationships with companies over time. This will improve the integrity of company formation and acquisitions – including making it more challenging for directors to engage in illegal phoenix activity.

The ABR and existing ASIC registers will continue to operate as per normal, until the new registry service is in place. For more information, visit abr.gov.au/MBRProgram.

Make a difference

The Phoenix Taskforce is dedicated to combating illegal phoenix activity. If you have suspicions about a business, please report it (you can remain anonymous if you prefer) on 1800 060 062 or at ato.gov.au/tipoff. Visit ato.gov.au/phoenix for more information.

Bronwyn Du Mont
Director, Debt — Significant Debt Management
Australian Taxation Office