Tax & ATO News Australia

ATO’s Changes Out Of The Ashes Of The Phoenix

 By now, most of us have heard the term Phoenix Company, described by Nick Sherry¹, as being “Similar to the mythical creature from which it takes its name, phoenix activity in its basic form involves the winding up of a company and the subsequent continuation of that business in a new ‘risen’ company.”

The great difficulty I have with terms like “phoenix” is that while they fit neatly into politicians’ soundbites and press releases, their real life application is much harder for the ATO to adequately define. This in turn means that taxpayers are left in the terrifying position of not knowing whom the laws are targeting.

In a 2012 report by PwC in conjunction with the Fair Work Ombudsman (Phoenix Activity Report), Phoenix activity was finally defined as; “the deliberate and systematic liquidation of a corporate trading entity which occurs with the fraudulent or illegal intention to: 

• avoid tax and other liabilities, such as employee entitlements
• continue the operation and profit taking of the business through another trading entity.”

There is no doubt, that the worst of these activities often leave a lasting legacy with unpaid wages, super, outstanding invoices to suppliers and other debts. The cost of which has been estimated at almost $2 billion by the ATO.

The key words in the PwC definition are “deliberate”, “systematic” and “fraudulent”. Where directors have engaged in such behaviour to avoid paying employee entitlements, then the full force of the law should be used. But what of the company that through no fault of the directors is left in a position where debts have mounted and the company cannot continue to operate? Should the same strict rules apply?

The great difficulty in administering tax law through emotive sound bites, is that it has the potential to lead ATO officers to think that acting tough should replace acting fairly. It is all too easy for an ATO officer to conclude that because a company has been liquidated, that the elements of fraud and deliberation must automatically be present. The cost and stress to taxpayers who are innocent of such charges is immeasurable.

The Federal Government has recently announced that it will establish two taskforces run jointly by the ATO and other governmental organisations (see below for full list of involvement), one of which will confront phoenix activity. Whilst this strategy by the ATO shows very clearly that it is willing to be very tough on the worst and most blatant offenders, I can’t help but also be concerned at the effect this may have on the vast majority of taxpayers who try to do the right thing. Don’t get me wrong, I encourage a tough approach by the ATO for those that deliberately flout the law, if at the same time, there is a more reasonable approach for the taxpayers who try to do the right thing, and inadvertently get something wrong. Worse yet is the potential for the nightmare scenario for taxpayers of being accused by the ATO of something that is just completely false.

I have seen too much time, energy and money wasted in the past, when the ATO directs its resources at the wrong people (as confirmed in the Inspector General of Taxation’s very recent report. It is not an exaggeration to say that the ATO has wrongfully destroyed people’s lives and businesses with misdirected efforts or at worst ill-intentioned or uninformed objectives.

So yes, by all means, I heartedly applaud the ATO for going after the crooks, but let the rest of the SME community get on with business without unfair and wrongful interference. I would like very much to see this become law, in a way that is balanced and fair.

Fortunately, the ATO is making changes and we, here at SMH, have had great results with recent settlements for taxpayers. The concern, again identified by the IGT, is that these changes depend on the commissioner of the day being a benevolent dictator.

1.   former Minister for Superannuation and Corporate Law

*The Trusts Taskforce is made up of the ATO, Australian Federal Police (AFP), Australian Crime Commission (ACC), Commonwealth Director of Public Prosecutions, Australian Securities and Investments Commission (ASIC), Australian Government Solicitor (AGS), Attorney-General's Department (AGD), AUSTRAC, Australian Competition and Consumer Commission, Australian Business Register (ABR) and Australian Prudential Regulation Authority.
The Phoenix Taskforce is made up of the ATO, ASIC, AFP, ACC, ABR, the Fair Work Ombudsman, Fair Work Building and Construction, the Department of Environment, the Department of Employment, the Department of Immigration and Border Protection and the NSW and Victorian Offices of State Revenue.
 

Posted in: Tax & ATO News Australia at 16 March 15

New ATO taskforce

In the wake of Crown Insurance Services recent win in the High Court, the ATO has announced a new taskforce to examine the activities of companies which have based themselves offshore.

Posted in: Tax & ATO News Australia at 17 July 13