Australian Action Against 'Phoenix' Activity

by Mary Swire, Tax-News.com, Hong Kong

18 March 2010

The Australian government has announced immediate action to assist in a crackdown on ‘phoenix’ activity by expanding and reforming the use of security deposits by the Australian Taxation Office (ATO), and, at the same time, significantly increasing the penalties for failing to comply with the requirement to provide such a deposit.

Security deposits are payments, similar to a bond, that are required to be paid by a taxpayer at the direction of the ATO in relation to an existing or future tax liability. Such a deposit is most likely where the ATO 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 liquidation of a company to avoid the payment of liabilities, including employee wages and superannuation, business creditors and outstanding taxes. The business is then resurrected and continues through another company free of those debts. It is estimated that such activity is taking up to AUD600m (USD550m) out of the national revenue base.

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

In order to assist action against phoenix activity, the government is to expand the coverage of the security deposits rules to cover all taxes administered by the ATO, including superannuation guarantee and goods and services tax payments, whereas previously the coverage was limited to only income tax liabilities.

"This change will help the ATO ensure taxpayers can't avoid any of their tax liabilities,” he added, “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 AUD2,200 to AUD11,000, and for companies from AUD11,000 to AUD55,000.

Finally, the level of transparency around how the security deposit provisions can be used by the ATO has also been boosted. In addition to increasing the ability to crackdown on phoenix activity, the updated provisions also apply to situations, for example, 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); and where the directors of a corporate taxpayer have a history of non-compliance.

The government released a consultation paper on phoenix activity in November 2009, and is currently considering the submissions it received. Apart from this immediate action, it is also looking at a wide range of other measures contained in that paper.

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