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Australia Consults On Combating Illegal Phoenixing

by Mary Swire,, Hong Kong

28 September 2017

The Australian Government has launched a consultation on proposals for addressing illegal phoenixing activity.

Phoenixing involves the stripping and transfer of assets from one company to another by individuals or entities, to avoid the payment of liabilities. It is estimated to cost the Australian economy up to AUD3.2bn (USD2.5bn) a year.

The consultation follows the announcement earlier this month of a package of reforms the aim of which is, according to the consultation document, "to deter and disrupt illegal phoenix activity and remove the unfair competitive advantage from this, while minimizing any unintended impacts on legitimate businesses and honest restructuring."

The measures proposed in the consultation document include:

  • Amending the Corporations Act 2001 to specifically prohibit the transfer of property from one company to another if the main purpose of the transfer was to prevent, hinder, or delay the process of that property becoming available for division among the first company's creditors;
  • In implementing this new offence, the Government will consider whether: both liquidators and the Australian Securities and Investments Commission (ASIC) should be able to claw back assets or compensation from the transferee; liquidators, ASIC, and creditors should be able to pursue compensation for the lost caused by the illegal phoenixing activity; and civil and criminal penalties should apply to illegal phoenix activity;
  • Making breaches of the Corporations Act's provisions on the failure to maintain adequate books and records and the failure to provide them to an insolvency practitioner in a formal insolvency "designated phoenix offences";
  • Imposing a rebuttable presumption that where a change in director notice is lodged more than 28 days (or another suitable period) after the date of the director's resignation, the director could still be held liable for misconduct that had occurred up to the point of lodgement;
  • Limiting a sole director's ability to resign from office without either first finding a replacement or winding up the company's affairs, by deeming such a resignation ineffective;
  • Restricting the rights of related creditors to vote at creditors' meetings;
  • Extending the promoter penalty laws to apply to promoters or facilitators of illegal phoenixing activity. Options include:
    • applying the promoter penalty law not just to "tax exploitation schemes," but also to activities designed to avoid taxation obligations, including by rendering a company unable to pay its obligations;
    • adding a new provision to provide that an entity must not engage in conduct that results in that or another entity being a facilitator of "illegal phoenixing activity;
    • creating a new provision outside the existing promoter penalty laws similar to the provision on the promotion of illegal early release of superannuation benefits.
  • Extending the Director Penalty Notice (DPN) regime to include companies' outstanding GST obligations, to allow the Australian Taxation Office to recover penalty amounts equivalent to the GST;
  • Introducing a mechanism for identifying and targeting phoenix operators, by a two-step process involving: designation as a "Higher Risk Entity", and declaration as a "High Risk Phoenix Operator" (HPRO) by the Commissioner of Taxation;
  • Introducing a "next-cab-off-the-rank" system for the appointment of liquidators; and
  • Establishing a dedicated "phoenix hotline," to allow for the reporting of concerns about suspected phoenixing activity.

Revenue Minister Kelly O'Dwyer commented: "The Government is committed to helping the honest and diligent entrepreneurs who drive Australia's productivity, but we won't tolerate those who misuse the corporate framework for their own advantage."

The consultation closes on October 27.

TAGS: individuals | compliance | tax | business | value added tax (VAT) | tax compliance | tax avoidance | law | entrepreneurs | goods and services tax (GST) | Australia | ministry of finance | tax authority | corporate governance | tax reform | penalties | services | Tax | Tax Evasion

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