Reform of the Australian insolvency law has recently gained increased momentum. September 2017, saw the introduction of the “safe harbour” laws seeking to provide a degree of protection to directors when faced with difficult times. While this is the case, the Federal Government has also announced a package of reforms targeting directors and advisors in relation to what they describe to be “phoenixing”.
“Phoenixing” is the process of moving assets of one company to a new company without the new company providing valuable consideration. This is done in an attempt to leave behind the liabilities of the first company such as the payment of taxes including GST. The GST system is reliant on businesses to be the collectors of the tax and then remitting that money to the Australian Taxation office (“ATO”). The other features of this activity is that usually there are common directors and the first company is then placed into some form of external administration.
Phoenixing to avoid paying GST has grown significantly in recent years. Offending companies claim GST input tax credits for their costs and expenses, collect GST from customers, do not remit the GST to the ATO, but instead then place the company into external administration.
This sort of behaviour has other affects. Knowing that the GST and other taxes will not be generally pursued by the ATO for some time, these companies pursue aggressive market share. This also adversely affects consumers, at the time when these companies are placed into external administration they are unable to complete the contracts obtained by aggressive market share practices.
ASIC data for the years of 2013 to 2017 suggests that about 12,000 insolvent entities had most likely engaged in some form of phoenixing activity. Estimates from Government suggests that the cost to taxpayers in lost revenue is around $3 billion dollars.
The proposed reforms include the following:
Overall, the new reforms are aimed at curbing bad corporate behaviour and they do so by imposing more express obligations on to directors and other advisers. These reforms should be viewed as part of the suite of amendments including those in relation to the safe harbour provisions.
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