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Federal government tightens ‘phoenix’ loopholes

Friday, 27 July 2012
By Leon Spencer

The federal government has tightened the loopholes allowing print businesses to perform a ‘phoenix’ manoeuvre, making it harder for rogue operators to claim bankruptcy and reopen under a new name while leaving creditors and staff in the dust.

On 29 June, the government changed the laws around businesses claiming bankruptcy, going insolvent or entering liquidation. The new laws mean that a business director will be personally liable if his business has withheld PAYG debt or employee superannuation contributions for over three months, and will be asked to pay outstanding debt out of his own pocket.

Following the changes, any PAYG still outstanding on 29 June, which was not reported within three months of the due date will result in a director penalty that can no longer be avoided by placing a company in administration or liquidation.

The new laws were introduced only days before the country’s Fair Work Ombudsman released a report finding that phoenix activity costs the nation between $1.78 billion to $3.19 billion.

The report defines phoenix activity as “the deliberate and systematic liquidation of a corporate trading entity which occurs with the fraudulent intention to: avoid tax and other liabilities, such as employee entitlements; and continue the operation and profit taking of the business through another trading entity.”

The research for the report, undertaken by PricewaterhouseCoopers, estimated that the annual cost of phoenixing in Australia is between $191 million and $655 million for employees in for form of unpaid wages and other entitlements, between $992 million and $1.93 billion for businesses as a result of outstanding unpaid debts, and up to $610 million for government revenue resulting from unpaid taxes.

However, with the new laws in place the Australian printing industry – which has been no stranger to business activity that could be described as phoenixing – can now hope to see fewer businesses going for the phoenix move.

Geoff Reidy (pictured), director of Rodgers Reidy Chartered Accountants, says that, while the new laws have been put in place for the tax office to target serial phoenix operators, it will reign in the loopholes used any other business that attempting to shut down and reopen under another name and, in fact, also affect businesses whose accounts may simply be out of date.

“The tax office for a long time has been concerned about the ease with which some operators move from company to company leaving behind a string of creditors, because the tax office is the main target of their operations,” says Reidy. “For the director of a large enterprise – If they’re PAYG went down past the three month limit, they would be liable as well.

“With no more ‘get out of jail free’ card, that’s a huge blow to intentionally dodgy operators. The difficulty will lie in the innocent director, who may not be as up to date with his personal affairs – if he doesn’t keep up with paper work, he might fall into the same category as the dodgy and be liable. That sort of person will also be caught in the debt,” he says.

While outstanding creditors of a company that has undergone a phoenix move will still not have the legal entitlement to demand payment from a previous company’s new entity, the new laws, designed with the tax office in mind, will make it harder for failing companies to leave a trail of debt with suppliers.

“[The new laws] give the tax office more powers than your average creditor,” says Reidy. “Why does your average creditor not have that power too? Old creditors can’t ask the new bloke to pay the old bills.

“For the true phoenix, though, it will limit the scope for those individuals. When a company goes broke the government will pay its employees entitlements, the only thing the government wouldn’t pay would be the super, because it was a tax. This legislation now says the rogue operators can’t leave super out of the equation, and they have bought that into the reporting scheme. So directors are in for a double whammy under the new legislation,” he says.

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One Response to “Federal government tightens ‘phoenix’ loopholes”

  1. August 01, 2012 at 2:21 pm,

    Bryan Heapy
    said:

    Great initiative – wish it was done in NZ.

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