New laws combatting illegal phoenix activities have been coming through thick and fast over the last 8 months. The most recent, introduced to parliament on February 13, is the Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill 2019 (the Bill).
The Bill builds on 2 previous additions to the anti-phoenixing legislative arsenal:
- the Treasury Laws Amendment (2018 Measures No. 1) Act 2018 (Cth) commenced on July 1, 2018 and requires GST on residential property purchases to bypass potential phoenixers and be paid direct to the ATO by the purchaser.
- the Insolvency Practice Rules (Corporations) Amendment (Restricting Related Creditor Voting Rights) Rules 2018 commenced December 7, 2018 and prevents related creditors unfairly influencing an external administration, for example by voting to replace an independent administrator with one who is complicit in the company’s dodgy dealings.
The current Bill before parliament proposes 4 further measures to combat illegal phoenixing:
New phoenix offences
Schedule 1 introduces new offences prohibiting the transfer of company property for less than market value where the intent is to cheat creditors of the benefit of that property in liquidation (creditor-defeating dispositions). Company officers and ‘other persons’ (e.g. pre-insolvency advisors) responsible for making or facilitating such dispositions can be subject to criminal charges, civil penalties and compensation orders.
Cost and uncertainty in establishing when a company becomes insolvent has hampered liquidators’ ability to pursue recovery actions in the past. Schedule 1 facilitates liquidators and ASIC to recover voidable creditor-defeating dispositions by extending the period in which the transactions may be voidable to 12 months prior to the company entering external administration.
The amendments allow ASIC to intervene where a liquidator fails to appropriately pursue recovery actions, for example where the liquidator is party to the illegal phoenix activity.
More accountability for resigning directors
Enabled by gaps in the current legislation, it has been possible to backdate company director resignations to avoid accountability and penalty, or to shift responsibility onto other directors. The current provisions paradoxically require a company to have at least one director but don’t prevent a sole director from resigning, even where no other director is appointed.
Schedule 2 of the Bill has director accountability in the crosshairs.
Under the proposed amendments, a director’s resignation date, if notice is received more than 28 days after the claimed date, is taken to be from the date that notification was received by ASIC.
Director resignations will only be able to be backdated on application to ASIC if within 56 days, or the court if within 12 months, of the purported resignation date.
In the new regime a director will be unable to resign or be removed by resolution if the company would be left without a director by the end of the same day, except in the case of winding up of a company.
Director penalties to include GST and GST estimates.
The Treasury Laws Amendment (2018 Measures No. 1) Act 2018 (Cth), came into force on July 1, 2018 and keeps GST out of the hands of phoenixers by requiring that GST on residential property purchases to be paid direct to the ATO by the purchaser.
Schedule 3 of the new Bill beefs up GST compliance further. Currently a business can delay its GST liabilities by failing to lodge a return. Schedule 3 authorises the Commissioner to make and collect estimates of GST liabilities that, under the new legislation, become payable on the day the company was required to lodge a GST return whether the return is lodged or not. GST (including LCT and WET) is also included in the Director Penalty Regime making directors personally liable for a company’s outstanding GST liabilities.
Retention of tax refunds
Working in concert with Schedule 3, Schedule 4 of the Bill authorises the Commissioner to retain a refund to a taxpayer who has any outstanding lodgements or information required by the Commissioner.
The current law allows retention of refunds where a taxpayer has an outstanding notification under BAS or PRRT provisions. A feature of illegal phoenixing is often delayed lodgement of returns that will result in a liability, and brisk lodgement of returns that will result in a credit. An illegitimate refund is claimed and stripped from the company before it is placed in liquidation.
Under the new measures the Commissioner can retain a refund until any outstanding return is lodged or information provided and apply the refund towards assessed outstanding taxes.
This measure is intended to complement the work being done to identify high-risk individuals and it is envisaged that the Commissioner will apply this new discretion to these operators in particular.
Company directors, their advisers and agents are focussed in the crosshairs of smarter, more robust anti-phoenixing monitoring and legislation. Expert advice from reputable practitioners is becoming imperative to help your clients comply with the increasing legislation and avoid pitfalls if insolvency comes knocking.