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Aug 18, 2008

Phoenix companies: a lurk on the rise

A showdown is looming between the Australian Taxation Office and Liquidators over the explosion in use of phoenix companies, writes Chris Seage.

A showdown is looming between the Australian Taxation Office and Liquidators over the explosion in use of phoenix companies. In a nutshell, a phoenix company, according to the ATO, is when individuals use limited liability companies to accumulate debts (usually to the Tax Office), liquidate the companies concerned and then carry on their business via a newly formed company. The cycle is repeated; the phoenix rises again.

In almost all cases the entities placed into liquidation have no assets and consolidated revenue is the big loser as the ATO cannot collect the PAYG, GST and Superannuation guarantee usually owing. The tax office is fed up with being left empty handed when these companies go down and is now targeting the directors of the companies and making them personally liable for the unpaid debts of the failed business.

When the Phoenix Unit commenced in 1998 it focused on repeat offenders and most of them were confined to the building and construction industry. Now everyone wants a piece of the action and if you liquidate a company for the first time and there is a big tax debt — watch out!

The tax office has changed the goal posts and broadened its definition of what they view as a “phoenix arrangement”. Serious offenders will have their personal assets seized while most will immediately go on to what I term “phoenix watch”.

This is part of the new tax office “early intervention strategy” to prevent the first timer from offending again. The failed director will initially receive a letter advising that their phoenix arrangements are under scrutiny and that various actions may be taken against them including more audit action, garnishee notices to trade debtors and financial institutions, making you personally liable for the tax debts of the company and prosecution action.

After you have recovered from the shock of the letter you will receive a phone call from a member of the friendly phoenix audit team who request you to make available a plethora of business records relating to the new corporate identity and its directors so they can check your lodgments and payments. The ATO message is clear; don’t liquidate in a hurry again. We are monitoring you.

I have previously described tax chief Michael D’Ascenzo as a revenue desperado. John Passant, a newly retired Assistant Commissioner of Taxation, also agrees that the ATO has become obsessed with protecting the revenue. D’Ascenzo is like one of those American military generals who think that collateral damage is ok so long as you win the war.

I believe many innocent people who have no intention of being a phoenix operator and have taken the best advice from accountants and liquidators are going to be caught up in this. So what do the liquidators think of all this? According to the ATO, liquidators are represented on their phoenix sub-committee and they agree with targeting companies that fail once as well as the tone of the big brother letter.

Liquidators I have spoken to say the ATO are not taking a commercial reality view of these arrangements.

“If a company is insolvent it is breaking the corporations act if it continues to trade. What does the tax office want us to do? We are damned if we do and damned if we don’t. Of course we consider administration and liquidation as part of the strategy to deal with the problem”, said one leading Sydney liquidator.

The tax office has broadened the definition of what they term a phoenix arrangement to the extent they have a different definition to what ASIC has but there doesn’t appear much information about phoenix companies on their website. How about a public ruling Mr D’Ascenzo?

The ATO have flagged phoenixing as a specific compliance issue in its 2008/09 Compliance Program released last week. During the period July 2001 to March 2008 they finalised 1,118 audits and raised over $438M.

In June federal parliament’s Joint Committee of Public Accounts and Audit said of phoenixing:

The Committee strongly disapproves of phoenixing. It fully supports ATO efforts to investigate and prosecute any reported instances of such practices.

So long as they get the crooks and leave the innocent taxpayers alone then everything should be fine.

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3 thoughts on “Phoenix companies: a lurk on the rise

  1. Les Heimann

    Phoenix company problems were not “discovered” by the ATO in 1998. They were one of the major reasons posited by the ATO for the revenue leakage (flood really) systemic in the old Sales Tax system. Been around for generations and the GST has done bugger all to fix them. Of course the ATO chased company directors of phoenix companies going back to the 1970’s (and before) with some but not much success. Nothing has changed and at the end of the day the ATO still has to demonstrate that the companies have gone into liquidation to escape their tax liabilities. Used to be that the law said you had to pay tax debts before anyone else got a look in – not any more. No matter which way you look there’s nothing new in tax cheating but it’s getting harder and harder to prove the cheats are cheating.

  2. Mervyn Langford

    Does the apparent problems the ATO is having with James Hardy (+/- $230m in outstanding taxes and penalties, Financial Times p7, 14/8/08) , amount to phoenixing?

  3. Ian Scott

    I can’t comment on how widespread this practice has been but a number of charities were caught or nearly caught by something similar in the 1990s. Individuals in a printing company we were about to use apparently had a history of taking on ‘charity’ jobs, raising funds for printing and distribution, delaying output or printing in a low cost way and then collapsing with all funds having been used in high cost transactions for rent and services. One of the serially involved parties was a lawyer who wrote threatening dire legal consequences for any comment on what had happened. Administrative staff at Non profits were not experienced, publicity shy and intimidated. We considered ourselves very fortunate, withdrawing from an arrangement and then finding out quietly about the practice once the threats started but shocked that people could be associated with the practice time and again without apparent sanction.