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Illegal Phoenixing: What is it and how are you affected?

27 Jun 19

In recent years, many Australian individuals and small businesses have been affected by a very serious issue which you may not have known existed – illegal phoenixing activity. Illegal phoenixing activity is a term which refers to when a new company is set up to continue the business of a company which has been liquidated in order to avoid paying its debts (such as taxes, creditors and employee entitlements).  Accordingly, as an issue, illegal phoenixing impacts not just the stakeholders in a company but the community at large.

How, When and Where Does Illegal Phoenixing occur?

The practice of illegal phoenixing has become more complex in recent years, however, there are some basic indicators you can use to identify when illegal phoenixing activity may be taking place.

The Australian Taxation Office (‘ATO’) has noted that illegal phoenixing is particularly prevalent in the industries of construction, labour hire, payroll services, security, cleaning and hospitality. Nonetheless, the activity may occur in any industry or location. With this in mind, it is vital to keep an eye out for the following warning signs when dealing with any company:

  • a familiar business contact trading under a new or different company name;
  • a company being controlled by someone who is not a listed director;
  • a person controlling a company having a history with liquidated or de-registered companies;
  • inconsistent usage of accounts to send or receive payments;
  • slower-than-normal procedures for tax or superannuation lodgments; and
  • unstable credit behavior.

As it generally takes some time for a business to fail, these factors may be identified months or even years before any illegal phoenixing activity occurs.

The Cost of Illegal Phoenixing to the Australian Economy

Given that illegal phoenixing is essentially a way for companies to escape its liabilities and financial obligations, the issue creates a significant cost to the Australian economy each year. In 2018, a report prepared by PricewaterhouseCoopers (‘PwC’) calculated this annual impact as ranging between $2.85 billion and $5.31 billion.

How are You Affected?

Of the figure identified by PwC, a considerable amount is comprised of payments owing to small businesses and employees of the fraudulent companies involved in illegal phoenixing.

  • For small businesses who have not received payment for the goods and/or services they have supplied to the fraudulent company – the cost is estimated to range from $1.6 billion to $3.2 billion.
  • For employees of the fraudulent company, they could lose out on entitlements such as unpaid wages and superannuation to the value of $31 million to $298 million.

When combined, small businesses and employees are victims to the majority of the losses incurred by illegal phoenixing. 

Current Protections in Place

One of the reasons why illegal phoenixing has grown to become such a significant issue is the historical lack of specifically targeted protection measures. Recently, however, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 was introduced to address this issue. Under the proposed commonwealth legislation, there are new and specific offences relating to the issue as well as criminal and/or civil penalties for individuals who are found in breach.  In terms of policy, there has also been the creation of a Phoenix Taskforce comprised of 34 Federal, State and Territory government agencies.

What You Can Do

If you suspect that illegal phoenixing may be occurring with a company you are employed under or have dealings with, you can report the issue directly to the ATO by completing an online tax evasion reporting form, emailing phoenix@ato.gov.au, or calling 1800 060 062.

This article was written by William Buisman of Salvos Legal. Salvos Legal is an award-winning social enterprise that is experienced in not-for-profit, all areas of commercial, property and migration law. All of its earnings from its services are going to fund the Salvos Legal (Humanitarian) which provides pro bono services to the community.

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