Illegal Phoenix Activity: are you liable?

Illegal Phoenix Activity refers to a company being purposely liquidated or otherwise closed for the sole goal of avoiding creditors. This is an illegal way in which some businesses avoid paying creditors and other liabilities, including taxes and funds owing to employees. Once the business has been shut-down, a new entity often pops up in a similar name, holding the previous company’s assets.

 Recently, the ATO has improved laws prohibiting illegal phoenix activity, making directors accountable for this offence. Before we get into these new changes, let’s learn more about how illegal phoenix activity is defined. The repercussions and impact of this offence can cast a wide net and may include avoidance of paying wages, superannuation, various staff benefits, supplier invoices and more. It can also include avoiding regulatory and other compliance obligations, or pending investigations for non-compliance, and can give an unethical advantage over competitors who are following industry rules.

 According to the ATO, many industries see illegal phoenix activity – everything from transport, mining, and agriculture to construction, labour-hire, and payroll services. It’s a serious issue, and this is why the ATO participates in the Phoenix Taskforce. This taskforce is highly specialised, designed to track down incidences of illegal phoenix activity, and made up of 38 separate federal, state, and territory government agencies.

 On February 5th, 2020, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 was passed by parliament. This amendment to the Corporations Act (2001) holds directors accountable for illegal phoenix activity.

 Directors should be aware that, according to the ATO, “If a company does not meet its pay as you go (PAYG) withholding, goods and services tax (GST) or super guarantee charge (SGC) obligations, we may recover these amounts from you personally as a director of the company.

 ATO and the Australian Securities and Investments Commission (ASIC) can now pursue new civil and criminal offences for those who promote or engage in illegal phoenix activity. ASIC and liquidators will have additional powers aimed at recovering assets for the benefit of employees and other creditors.

The new laws will also allow [the ATO] to:

  • estimate and recover the anticipated GST,luxury car tax (LCT), and wine equalisation tax (WET) liabilities for businesses that aren’t meeting their lodgement obligations
  • make directors personally liable for their company’s unpaid GST, LCT and WET liabilities
  • retain a tax refund where a taxpayer has failed to provide a notification to us which affects, or may affect, the amount of the refund.”

In addition to these changes, it’s important to be aware that the Federal Government has extended the existing 6-month stay on insolvent trading liability to December 31, 2020. If you’re a business owner or company director, we recommend you ensure you understand the implications of this change.

 As defined by the ATO, the package includes:

·         ‘A temporary increase in the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands they receive;

·         A temporary increase in the threshold for a creditor to initiate bankruptcy proceedings, an increase in the time period for debtors to respond to a bankruptcy notice, and extending the period of protection a debtor receives after making a declaration of intention to present a debtor’s petition;

·         Temporary relief for directors from any personal liability for trading while insolvent; and

·         Providing temporary flexibility in the Corporations Act 2001 to provide targeted relief for companies from provisions of the Act to deal with unforeseen events that arise as a result of the Coronavirus health crisis.’

If you’re a COVID-impacted business owner or company director, the ATO is available to assess individual circumstances and tailor solutions accordingly. This may take the form of payment deferrals, temporary payment reductions, or in certain circumstances, ‘withholding enforcement actions including Director Penalty Notices and wind-ups’.

How can Halkin Business Partners help?

 Speak to our financial specialists today to ensure you fully understand your obligations and liabilities as a Director, and to see how Halkin Business Partners can help you with your financial needs.