In brief - The Federal Government's push for significant corporate and taxation reform to quash phoenix activity has stalled, but probably only temporarily
The federal election result means that the government's Treasury Laws Amendment Bill and Insolvency Practice Rules Amendment look to be back on the agenda. Company directors should take action now to understand the phoenix reforms and consequences for non-compliance.
What is phoenix activity?
Phoenix activity is not formally defined, nor specifically prohibited, in Australian law. Generally, it refers to the process of ending the existence of one company, then continuing to run the same business through another.
That process may amount to an abuse of the corporate form, where individuals are using the phoenix company to avoid the payment of debts that were incurred by the original company (in particular tax and superannuation charges).
Not all phoenix activity is illegal, however. A legitimate business rescue, or incompetent management continually seeking to resurrect its business, is not, without anything further, illegal.
Typically, illegal phoenix activity involves some other breach of the law, such as non-compliance with directors' duties or fraud.
How is phoenix activity addressed by statute?
Phoenix activity is addressed by a suite of legislation, particularly in tax and corporations law. Generally, these provisions use the threat of personal director liability to make engaging in phoenix behaviour more risky for directors with illegitimate intentions.
For example, if a company fails to pay its Pay-As-You-Go withholding and superannuation guarantee charge liabilities, the director will become personally liable for a penalty equal to that liability. The Commissioner of Taxation will then issue a Director Penalty Notice, and proceedings may be commenced 21 days later for recovery.
For liabilities that were reported to the Commissioner of Taxation within three months of the due date, the director can discharge the penalty by paying the debt, or appointing an administrator or liquidator. However, to the extent that the liability is for amounts not reported within three months of the due date, the penalty must be paid by the director.
In effect, the regime disincentivises the hallmark phoenix practice of secretly accruing tax debts and retaining withholding employee entitlements to disguise cash flow problems.
What reforms were presented last year?
In the 2018-2019 Budget, the Coalition Government announced a package of reforms to "deter and disrupt illegal phoenixing and more harshly punish those who engage in and facilitate this illegal activity."
These reforms sought to:
introduce new phoenix offences that target those who conduct/facilitate illegal phoenix transactions
prevent directors from backdating resignations to avoid personal liability
prevent sole directors from resigning and leaving an empty corporate shell
extend director penalty provisions to include personal liability for GST and related liabilities
allow the ATO to retain refunds where tax lodgements are outstanding, and
restrict voting rights of related creditors in meetings regarding appointment/removal/replacement of external administrators
Read more about the Reforms to combat illegal phoenix activity - Draft Legislation.
These amendments were in addition to the Business Register and Director Identification Numbers (DIN) legislation also announced in late 2018. That reform introduced the assignment of a DIN to every director to enable the tracking of directors to assist detection of phoenix activity.
The amendments are to be backed up by serious penalties. For example, if a director is appointed and an application for a DIN has not been made within 28 days of their appointment, a maximum penalty of $200,000 for an individual, or $1,000,000 for a body corporate may apply.
Where does the election leave those reforms?
Despite the completion of consultations and discussion in the House of Representatives, both amendment bills lapsed when the federal election was announced.
Then, during the campaign, Bill Shorten stated that a Shorten Labor Government would develop a national framework to stop "dodgy phoenix activity" and "name and shame" directors involved. This included a "Tradie Pay Guarantee" and a "Tradie Litigation Fund."
Since Labor's defeat, the media suggest that regulators are preparing for business as usual, as they operate on the basis that the previous government's amendment bills will likely eventuate.
What should company directors do?
Given the penalties for non-compliance, all companies and company directors should be making themselves familiar with the provisions before they come into effect. It will pay to be proactive.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2021.