phoenix activity reform

What phoenix activity reform would look like under a Labor government

The Australian Labor Party has recently signalled its intention to crack down on illegal phoenix company activity. This often overlooked aspect of the commercial world is actually a huge area of tax evasion, and one that is costing the Australian state billions of dollars of revenue on an annual basis.

What are phoenix companies?

Before we discuss how and why Labor is planning to reform phoenix activity, let’s first of all look at the basics. Phoenix companies are commercial entities that emerge when another company folds through insolvency. The new company then has the right to immediately begin trading in a similar field to its predecessor, while also often avoiding tax liabilities.

The Australian government first noted the existence of phoenix activity in 1994, while the practice was considered significant enough a decade later that the 2003 Final Report of the Royal Commission into the Building and Construction Industry devoted an entire chapter to discussing the influence of phoenix companies in that particular industrial sector.

Early legislation

It is only in recent years that phoenix practices have been addressed legislatively. Proposals were first lodged by the Treasury in 2009, and this led to several Acts of government ultimately being passed three years later. But they still stopped short of the regulatory solution deemed necessary, and thus two significant government reports were released in 2015 with the intention of crafting a legislative program that really addressed phoenix activity.

The Productivity Commission Report on Business Set Up, Transfer and Closure, and the Senate Economic References Committee Report were the result of this process, and laid a foundation for cracking down on inappropriate phoenix activity. The Labor Party has now picked up the baton, and is moving forward with proposals regarding the reform of regulation in this area.

According to the Labor plan, phoenix directors described by the political party as “dodgy” will be named and shamed, as the likely incumbent government’s attempts to shore up the taxation system. The tax issue isn’t the only motivation for this policy, though, with Labor also asserting that its approach to dealing with phoenix companies will help protect vulnerable workers and boost economic productivity.

Tax figures

Putting a precise figure on the amount of revenue squandered by phoenix companies isn’t easy, but there has been some investigation into the matter. According to a report published recently by the Phoenix Taskforce, the Australian economy was effectively robbed to the tune of $5.1 billion in the 2015-16 tax year by phoenix companies. This isn’t even where the story ends – $1.6 billion in taxes were resultantly never recovered, and Australian workers lost out on an estimated $300 million in wages that they were never paid.

It is clear then that this is an issue which impacts on every sector of society, with taxpayers forced to foot the $1.6 billion tax bill instead. For example, we know, thanks to freedom of information laws, that 1,322 people – who were each directors of two or more companies that failed – were responsible for a quarter of the unpaid wage bill, equal to $400 million. Yet the employment department was unwilling to reveal the identity of any of the directors that contributed to this massive figure, a wrong that Labor clearly intends to correct with the 2019 general election imminent.

Naming and shaming is one thing, but many will observe that companies such as Amazon, Google, Facebook, and many others, have been outed as operating dubious tax policies previously, and none of them appeared to be particularly embarrassed or impacted by this. So, Labor has revealed a tranche of other measures alongside its plans to out directors, each of which is intended to strengthen legislative provisions against phoenix companies.

New powers

Labor has also proposed to give power to the Commissioner of Taxation to apply to the Australian Securities and Investments Commission to have the worst phoenix tax offenders formally disqualified. This is not guaranteed, and would be dependent on a formal legal process, but it could see directors who engage in or oversee the worst examples of non-compliance being prevented from setting up new companies, and operating in that capacity again.

Another proposal that Labour made previously was to require all company directors to obtain a unique Director Identification Number with a 100-point identification check. This has been a major plank of Labor’s policy in this area, with the party proposing this change to the law over 18 months ago.

Joining forces

Labor has joined forces with the Productivity Commission, the Australian Institute of Company Directors, the Senate Economics References Committee, the Phoenix Research Team and the Australian Restructuring Insolvency & Turnaround Association to form a united front, all calling for this measure to address phoenix companies. Labor has indeed been critical of the coalition government since then, accusing it of stalling legislation and direct action which is potentially costing the Australian taxpayer and economy billions of dollars.

Under the Labor proposal, both existing and prospective directors would be required to acquire an identity number. This would then enable small businesses, liquidators and enforcement agencies to access information on directors, including their previous conduct with relation to phoenix companies, and their previously held directorships.

Labour suggests that this would be a major step forward compared to the existing system, which simply makes it too easy for directors to evade detection when engaging in dishonest activity. When registering an Australian company currently, all that is required is the name, address, and date and place of birth of each proposed officeholder. This lack of data being held on directors means that many can escape their obligations and moral duties, hurting Australian workers, and kicking the economy and taxpayer in the teeth.

Subcontractor moves

Other measures related to phoenix companies suggested by Labor relate to subcontractors. Labor has actually put a good deal of thought into ensuring that subcontractors are covered by its phoenix company policy, and this has led to several suggestions from the party in this area.

Should the Labor Party and Bill Shorten be elected to office at the next federal election, they plan to implement what is referred to as the ‘Tradie Pay Guarantee’. This is intended to ensure that subcontractors working on government projects are protected, and never left unpaid when businesses deliberately go bust in order to avoid their financial obligations.

Labor has ventured further afield with its policy here as well, pledging to establish a new requirement for large Commonwealth construction projects that would see project bank accounts established that use cascading statutory trusts. This might sound like a bit of a mouthful, but what it essentially means is that all businesses involved down the supply chain should get paid on time. The party claims that this will help shore up workers’ rights in Australia, at a time when many people are feeling the pinch.

New national framework

Running parallel with this initiative will be a new national framework that will further bolster the rights of subcontractors and small businesses. Labor notes that it is all too common for small commercial entities to be left out of pocket due to much bigger companies dissolving and engaging in dishonest phoenix activity.

In order to address this, the party has promised to set up an efficient process for handling disputes, while Labor would also establish a federal security of payments legislative regime, which will be based on the recommendations of the Murray Review. The Murray Review of Security of Payment Laws in Australia contains 86 recommendations which cover a wide range of areas including issues outside of the current Security of Payment regime, and provides the foundation for this new Labor policy, despite having been set up by the current coalition government.

Another major facet of the Labor policy is the intention of the party to work closely with administrations at the state level. Labor asserts that this will help localise and harmonise its phoenix company scheme across the country, adding extra value to the federal program. Central to this process will be regular consultation on the referral of powers to the federal program.

Tradie Litigation Fund

A final effort in this area will involve the creation of a new $7 million Tradie Litigation Fund for subcontractors across Australia. Before discussing the basis of this policy, it should perhaps be noted that $7 million doesn’t seem like a vast amount of money on a national level. But it at least demonstrates a commitment to holding phoenix companies to account in the judicial system.

According to Labor, this new $7 million fund will enable subcontractors to have a realistic hope of taking fraudulent companies to court. This would then help protect the livelihoods of small businesses, workers, and subcontractors who currently have little legal protection available to them when dealing with phoenix companies. The fund is intended to enable the Australian Securities and Investments Commission (ASIC) to advance trickier legal cases, without having to fritter away the resources of the corporate watchdog.

Stronger deterrents

Labor proclaims that this will act as both punishment and deterrent for nefarious directors, ensuring that the number of phoenix companies being created is decreased, while the full weight of the law would be able to come down on those that are found to have operated unethically.

With this in mind, Labor proposes that directors who deliberately burn their companies should be subject to the full consequences of failing their directors’ duties. This would entail them being liable for compensation, fines of up to $200,000 or five years in prison. This is certainly some tough rhetoric, and would seem to represent a serious change in policy, if Labor is able to enact it.

Summary

So to summarise, Labor’s new plan includes the following:

  • Requirement for all company directors to obtain a unique Director Identification Number with a 100-point identification check.
  • Increase penalties associated with phoenix activity, including the possibility for lengthy penal sentences.
  • ‘Dodgy’ phoenix directors to be named and shamed publicly.
  • Power will be given to the Commissioner of Taxation to enable the worst phoenix tax offenders to be formally disqualified.
  • The ‘Tradie Pay Guarantee’ will help protect government subcontractors.
  • A new national framework will further bolster the rights of subcontractors and small businesses.
  • A federal security of payments, based on the recommendations of the Murray Review, will be established.
  • There will be a new $7 million ‘Tradie Litigation Fund’, intended to ensure that tradesmen and women impacted by phoenix companies can take legal action.

While Labor proclaims that it will robustly strengthen legislation in this area, it should also be noted that there have been prosecutions and enforcement activity related to phoenix companies already. The Fair Work Ombudsman has investigated several high profile cases. In one case, a business owner in Western Australia was jailed for five years for what was deemed illegal phoenix activity, while in another matter, the New South Wales Supreme Court struck off an advisor after finding him in dereliction of duties. Several other companies have been pursued as well.

Nonetheless, with Labor currently a heavy odds-on favourite to achieve a majority at the forthcoming general election, it seems likely that the party will soon have the opportunity to enact its plan. All eyes will then be on whether the party follows through on its promises, and is genuinely determined to ensure that phoenix activity, which costs billions in tax dollars and many people their modest livelihood, is finally adequately addressed.

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