17 March 2010

Immediate action to assist in crackdown on fraudulent 'phoenix' activity

The Assistant Treasurer today announced immediate action by the Rudd Government to assist in the crackdown on "phoenix" activity by expanding and reforming the use of "security deposits" and significantly increasing penalties for failing to comply with the requirement to provide a security deposit.

Security deposits are payments, similar to a bond, that are required to be paid by a taxpayer at the direction of the Tax Commissioner in relation to an existing or future tax liability. Alternatively, the Commissioner may accept security in another form like a mortgage over property or a guarantee. Refusal to provide a security deposit is a criminal offence.

Such a deposit is most likely where the Tax Commissioner believes that the foreign taxpayer is establishing or carrying on a business in Australia for a limited period of time only or where some other risk makes a deposit appropriate, such as a risk of phoenix activity.

Phoenix activity involves the deliberate, and often systematic, liquidation of a company to avoid the payment of liabilities, including employee wages and superannuation, business creditors and outstanding taxes. The business then "rises" and continues through another company free of those debts.

"Phoenix activity is totally unacceptable and all too often leaves hard-working families completely out of pocket for work they've already done," the Assistant Treasurer said.

"Phoenixing also gives unscrupulous companies an unfair competitive advantage against those businesses that do the right thing."

"The latest estimates show phoenix activity may be ripping up to $600 million from the national revenue base – but today's important changes will make it easier to step-up action against phoenix activity."

"To achieve this, we've significantly updated provisions that have been largely unchanged for over 70 years by expanding the coverage of the security deposits rules to cover all taxes administered by the Tax Commissioner, including superannuation guarantee and GST payments, whereas previously the coverage was limited to only income tax liabilities."

"This change will help the Commissioner ensure taxpayers can't avoid any of their tax liabilities and will limit the effectiveness of tax avoidance schemes like phoenix activity and is consistent with current tax administration policy to have a single set of general collection and recovery rules for all taxes."

The penalty for non-compliance with a requirement to provide security has also been significantly increased for individuals from 20 penalty units ($2,200) to 100 penalty units ($11,000), and for companies from 100 penalty units ($11,000) to 500 penalty units ($55,000).

"The level of penalty has not been changed since 1936, so it no longer provides an adequate deterrent for taxpayers who do not comply with a requirement to provide security," said the Assistant Treasurer.

"This is about sending a strong signal to anyone contemplating using a phoenix company, that you will be caught out."

Finally, the level of transparency around how the security deposit provisions can be used by the Tax Commissioner has also been boosted with the addition of new machinery rules to provide taxpayers with certainty about their rights and obligations.

These changes have been introduced into Parliament in the Tax Laws Amendment (Transfer of Provisions) Bill 2010 as part of the rewrite of Part VI of the 1936 Income Tax Assessment Act into the Taxation Administration Act 1953.

In addition to boosting the ability to crackdown on phoenix activity, the updated provisions also apply to situations such as:

  • where a taxpayer plans to temporarily carry on an enterprise in Australia and leave without returning;
  • where the taxpayer has a history of non-compliance (including by defaulting on their tax liabilities);
  • where the directors of a corporate taxpayer have a history of non-compliance; and
  • where the Commissioner is granting a taxpayer the benefit of a payment arrangement.

The Government released a consultation paper on phoenix activity in November 2009, which can be viewed at www.treasury.gov.au, and is currently considering the submissions it received.

"This immediate action is another significant step towards helping honest businesses compete on a level playing field," said the Assistant Treasurer.

"We are also looking at a wide range of other measures contained in our consultation paper."