Tuesday 17 November 2009

When did Australia turn into a nation of cheats?


In October this year the Australian Tax Office appeared before a bi-annual hearing of the Joint Committee of Public Accounts and Audit and explained its approach to companies which were liquidated then reformed, as a new company using the same assets, in order to avoid meeting debt obligations to creditors and employees:

Phoenix activity

In 2008-09, we maintained a focus on those who engage in Phoenix activities, and intervened earlier to ensure the liabilities of current entities were kept up to date and paid on time. We ran a targeted letter/phone campaign directed to those who appeared at risk for repeat Phoenix behaviour.
The Tax Office, the Australian Securities and Investments Commission and the Treasury are working together to identify a range of potential legislative remedies that could help us better address fraudulent phoenix behaviour.
Since 2000, ten company directors have been prosecuted for phoenix-related offences, arising from Tax Office referred matters. An additional four briefs of evidence are currently with the Commonwealth Director of Public Prosecutions (CDPP), with charges laid in relation to three matters. The are currently five potential prosecution cases in the pipeline for referral to the CDPP.
During 2008-09, 124 phoenix cases were finalised raising $83.3 million in tax and penalties.
[ATO submission to the Joint Committee dated 19 October 2009]

Since then Adele Ferguson writing in The Brisbane Times and The Age has revealed that:

CORPORATE Australia is littered with company directors who have managed to survive multiple company failures, a trend that suggests illegal ''phoenix'' companies are on the rise.
Research compiled exclusively for BusinessDay by Dun & Bradstreet indicates a 25 per cent jump in the number of companies entering external administration during the 2009 financial year that had at least one director who had already been involved in a wound-up business.
Even more alarming, of the 10,264 companies that went belly up in the year to June 30, a staggering 43 per cent involved companies with directors of previously wound-up companies.
The research indicates the worst offenders tend to gravitate to the building and construction sector, employment agencies, labour hire, security and infrastructure.

and

Using a database of 2.8 million credit-active entities in Australia, Dun & Bradstreet revealed an 18 per cent surge in companies entering external administration in 2009. At least one director had previously been involved with four wound-up entities.
Dun & Bradstreet's chief executive, Christine Christian, said the research showed that directors on the board of a company that has gone into external administration were 250 per cent more likely to be involved in an insolvent wind-up in the following 12 months.

Phoenix companies are not a new phenomena as the answer to a 2005 Question on Notice by the then Member for Barton Robert McClelland confirms:

The Commissioner of Taxation advised me that since 1998 the Tax Office has maintained a planned and co-ordinated focus on individuals who use, or promote the use of, successive company structures to intentionally evade payment of taxes. A major focus of the Tax Office has been on serial (Phoenix) offenders who use deliberate and fraudulent methods to avoid their obligations.

This type of business activity is not unknown on the NSW North Coast and in recent years has cost the local workforce and retirees with small investment portfolios dearly in some instances.

The length of time the problem has been a highly visible issue combined with the low number of prosecutions and often risible court-imposed penalties leads to the following questions:

  • Is it really good enough for the Australian Tax Office and Directors of Public Prosecutions to clearly place a sustained regime of prosecuting phoenix activity repeat offenders in the too hard basket?
  • Has cheating creditors and employees become an accepted method of conducting business in Australia?
  • Now that the Member for Barton is Australia's Attorney General, what is he going to do about the holes in corporate law which are allowing dishonest company directors to get away with this blatant form of theft?

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