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Apr 19, 2018

A Matter of Phoenixing or Tax Revenues?

Contact: Maurice Falcetta

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:

  1. The introduction of a Director Identification Number (DIN) which identifies the directors and links them to their present and previous directorships. The director is then required to quote their number when incorporating a new company. This will interface with government agencies and ASIC databases to allow regulators to record the relationships between individuals and entities and other people more easily.
  2. The inclusion of a specific phoenixing provision in the Corporations Act making it an offence to transfer property from one company to another if the main purpose of doing so it to avoid paying creditors;
  3. Extending the offence to those who encourage tax avoidance schemes ie advisers who assist the phoenix operators such as accountants and financial advisers;
  4. Provisions which address the issue of backdating a director’s appointment or resignation. So that if a change of director form is lodged more than 28 days after resignation, the director could still be liable for misconduct up to the date of lodgement;
  5. Greater power to the ATO to use the garnishee power to recover a security deposit from a suspected phoenix operator;
  6. Making directors personally liable for GST liabilities as part of the extended director penalty provisions; and
  7. Prohibiting related entities to the phoenix operator from appointing a liquidator.

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.


The information in this document represents general information, and should not be relied for your specific circumstances. If you require legal advice and assistance on the matters contained or associated in this document you should contact Trinity Law. Subject to the limits of the law, Trinity Law disclaims any liability on persons relying on this document.

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