16 August 2018

Legislation to combat illegal phoenix activity released for consultation


The Turnbull Government is taking action to protect workers and honest businesses by legislating a package of reforms to tackle illegal phoenix behaviour and level the playing field.

The Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP, today released draft legislation for a comprehensive package of reforms to combat illegal phoenixing. These measures will both deter and disrupt the core behaviours of illegal phoenixing and more harshly punish those who engage in and facilitate this illegal activity, including pre-insolvency advisers.

Phoenixing occurs when the controllers of a company strip the company's assets and transfer them to another company, to avoid paying the original company's debts. The Phoenixing Taskforce's recently published report estimates the cost of illegal phoenxing to the Australian economy at between $2.85 billion and $5.13 billion annually.

"The Government is cracking down on illegal phoenix activity for the benefit of all the hard-working Australians who are negatively affected by this abhorrent behaviour. This reform package is based on strong support provided from stakeholders in response to the consultation paper, and is informed by the work of the Government's Phoenixing Taskforce. The package will give our regulators better tools to deter and disrupt this illegal activity," Minister O'Dwyer said.

The proposed corporations and tax law reforms will deter and disrupt the core behaviours of phoenix operators. The reforms will:

  • Create new phoenix offences to target those who engage in and facilitate illegal phoenix transactions;
    • It will now be an offence for company directors to engage in creditor‑defeating transfers of company assets that prevent, hinder or significantly delay creditors' access to those assets.
    • Pre-insolvency advisers and other facilitators of illegal phoenix activities will also be on the hook, with a separate offence for any person who procures, incites, induces or encourages a company to make creditor‑defeating transfers of company assets.
    • These will be both criminal and civil offences, attaching the highest penalties available under the law.
    • The offences will be supported by an extension of the existing liquidator asset clawback avenues to cover illegal phoenix transactions. ASIC will also receive a new regulatory tool to recover property that has been transferred under an illegal phoenix transaction. This tool will be particularly important where a liquidator is complicit in or turning a blind eye to illegal phoenix activity. These supporting measures will assist with the quick and efficient recovery of property, for the benefit of all employees and creditors.
  • Prevent directors from backdating their resignations to avoid personal liability;
  • Prevent sole directors from resigning and leaving a company as an empty corporate shell with no directors;
  • Restrict the voting rights of related creditors of the phoenix company at meetings regarding the appointment or removal and replacement of a liquidator;
  • Make directors personally liable for GST liabilities, as part of extended director penalty provisions;
  • Extend the ATO's existing power to retain refunds where there are outstanding tax lodgements.

The legislation is tightly targeted at those who misuse the corporate form, while minimising any unintended impacts on legitimate business restructuring.

The reforms complement and build on other Government initiatives to combat crime and fraud in the economy being undertaken by the Phoenix, Black Economy and Serious Financial Crime Taskforces, and other announced reforms such as the establishment of a Director Identification Number, and the establishment of a new Phoenix Hotline which makes it easier to report suspected phoenix behaviour so the ATO and partner agencies can pursue those who are doing the wrong thing.

Further action the Government has taken include law reform to curb the corporate misuse and excessive drain on the tax-payer funded Fair Entitlements Guarantee Scheme, to improve collections of GST in the gold trading industry and new residential property transactions (which are vulnerable industries to illegal phoenix activity), to tackle non-payment of the Superannuation Guarantee, and to target black economy activities.

Stakeholders are invited to lodge submissions online via the Treasury website by 27 September 2018.