Australia: ATO Hotline: another measure to prevent illegal phoenix activity

1800 rising-from-the-ashes.

Phoenix activity in business is not a new concept and for decades now, the government has been trying to combat. Recently, it has bolstered its arsenal in implementing a host of the 2014 Productivity Commission's recommendations to defend lost revenue arising from phoenix activity. The latest measure is a new "Phoenix Hotline"—1800 807 875—where people can report suspected phoenix behaviour directly to the Australian Taxation Office (ATO), so it can pursue those wrongdoers.

Time will tell if these measures will work, given that since the 1970s, the successive governments have sought to stamp out unscrupulous advisors promoting schemes to strip a company of its assets for no consideration, leaving it unable to pay its taxes and creditors and thereby sending it to the "bottom of the harbour". The 1980 Costigan Commission, investigated these so-called 'bottoms of the harbour' tax evasion schemes. A leaked report of the Commission's findings implicated a prominent businessman codenamed the "Goanna". Kerry Packer was alleged to be the "Goanna" and his defence team was led by our now Prime Minister. Packer's defence resulted in the Attorney General formally dismissing the allegations. That aside, the coincidence is not lost that Prime Minister Malcom Turnbull is now implementing some of the strongest measures to prevent phoenix activity (the modern-day 'bottom of the harbour' scheme) to circumvent further leakage of government revenue and increasing business losses.

In 1987, the ATO reported that 6,688 companies had been involved in 'bottom of the harbour' schemes. This equated to $1 billion in lost tax revenue at that time. If one were to translate these losses into today's monetary terms, it could quite possibly exceed the estimated lost tax revenue from wrongdoing in 2018, which the government estimates range between $2.85 to $5.13 billion. Perhaps this shows that some of the "anti – phoenixing" measures implemented since the 1970s have been successful.

Recent announcements made in the 2018 federal budget for further proposed changes to legislation are designed to allow regulators to better combat illegal phoenix activity. These proposed changes include:

  • bringing in new phoenix offences to target operators who conduct or facilitate the practice
  • preventing directors from being able to improperly backdate resignations to escape liability or persecution
  • limiting the ability of directors to resign if their resignations would leave a company with no directors
  • restricting the ability of related creditors to vote on appointing, removing or replacing external administrators
  • extending the Director Penalty Notice regime to GST, luxury car tax, and wine equalisation tax, which would make directors personally liable for those company's debts.

The introduction of the Phoenix Hotline and above proposed legislative changes will likely supplement the Phoenix Taskforce's work, which started in 2015. The taskforce comprises 30 Federal, State and Territory government agencies, including the ATO, Australian Securities and Investments Commission (ASIC), Department of Employment, and the Fair Work Ombudsman. The purpose of the Phoenix Taskforce is to provide a whole-of-government approach to combatting illegal phoenix activity. Taskforce results for the 2017/18 financial year include:

  • conducting 340 audits and reviews
  • raising $270 million in additional tax liabilities
  • collecting and returning of $190 million to the community
  • obtaining seven criminal convictions
  • banning 34 directors from acting as directors.

Pre-insolvency advisors who facilitate phoenix activity continue to fall under the eye of the taskforce and other regulators. So much is the case, that Phoenix Taskforce raided certain pre-insolvency advisors' offices. The more significant of these occurred in August 2016 when 120 officers from ATO and ASIC visited 13 business and residential sites across two states. This was then followed by further, without notice, 80 site visits mainly in Victoria in April 2017. The August 2016 raids were triggered by complaints from the tax profession and registered liquidators as well as intelligence gathered by the Phoenix Taskforce. It is likely that the Phoenix Hotline will result in more intelligence being collected by the authorities that will lead to more 'without notice' inspections and regulator action. This coupled with the foreshadowed introduction of Director Identification Numbers will create a regulatory landscape that, as only a matter of time, will identify advisors and directors participating in illegal phoenix activity.

So, what does this mean?

With more sophisticated mechanisms to identify and prevent illegal phoenix activity, it is imperative that clients in financial distress seek out the correct advice from suitably qualified professionals. In the absence of such advice, clients may also face further scrutiny from the regulators where they might be perceived as conducting illegal phoenix activity. This additional scrutiny will only add to the stress met by businesses facing insolvency. Your local Worrells Partners are qualified and experienced to advise your clients in financial distress. They give initial advice as complimentary and confidential, without obligation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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