Flame

Rising from the ashes

Deliberately liquidating a company to avoid tax is illegal, but governments can struggle to determine intentional corporate phoenixing from genuine liquidations.

Author

Melissa Adler

Illegal corporate phoenixing is a persistent public policy problem that has widespread negative impacts on the economy. Previous governments have sought to eliminate this practice. The challenge for governments looking to regulate in this area is that it is often impossible to distinguish between legitimate business practices to rescue a business in difficulty and intentional activities to avoid legal liabilities.

The term ‘phoenixing’ has been adopted to describe the resurrection of a company after insolvency, mirroring the behaviour of a mythical bird – the phoenix. In ancient mythology this glorious bird is born again, obtaining new life by arising from the ashes of its predecessor.

Phoenixing in the corporate world is illegal when there is deliberate and systematic liquidation of a company with the fraudulent or illegal intention to avoid tax and other liabilities. The business then continues to operate and take profit through another entity, disclaiming any responsibility for the debt of the previous company.

While it is difficult to quantify its impact, the Fair Work Ombudsman estimates the cost of illegal phoenix activity to be in the range of $2.85 to $5.13 billion, with the estimated direct cost on business being between $1,162 and $3,171 million per year.

In response the Commonwealth Government established the Phoenix Taskforce in 2014 and the Black Economy Taskforce in 2016, each of which focuses on combatting illegal phoenixing.

The Phoenix Taskforce, an inter-agency taskforce made up of a range of government agencies, was established with a view to jointly identify, manage and monitor suspected illegal phoenix activity.

The Black Economy Taskforce, established principally to examine behaviours occurring outside the tax and regulatory system, made a number of recommendations in response to illegal corporate phoenixing. Proposals that would require company directors to register for a unique Director Identification Number (DIN) are currently being progressed and look likely to be implemented. The DIN will provide traceability of a director’s relationships across companies and enable better tracking of directors of failed companies. This will assist regulators and external administrators in investigating illegal phoenix activity.

The government is also pursuing legislative reforms targeted at identifying, discouraging and penalising those engaging in illegal corporate phoenixing. While these moves should be encouraged, reforms such as a proposal to make all company directors personally liable for unpaid GST seem a step too far, and fall outside the remit of targeting illegal phoenixing behaviour.

There is more work to be done in unravelling and responding to this complex issue and the construction industry features extensively in discussions about illegal phoenixing. HIA will keep members informed as developments come to light.

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