Small business is supporting proposed anti-phoenix law
Predictably some small business owners are saying the Federal Government’s draft legislation to stop phoenixing won’t work – including a requirement for company directors to have identification numbers (DINs). However, while a minority claim “this is a proliferation of red tape”, most believe the proposed legislative reform is clearly in their best interests.
Chief Executive of the Council of Small Business Australia Peter Strong has sought to calm dissenters with an assurance he’s in continuing talks with the Australian Taxation Office (ATO), and regulators, to ensure policy recommendations to the Government on the issue are “properly balanced”.
Why there must be change
Mr Strong tells us that while Australian governments generally do a good job in helping people start businesses, more needs to be done to make sure those who have an ABN “are bona fide”.
And Macks Advisory agrees. Directors of phoenix companies are bleeding Australia’s economy of up to $5bn annually. Over and above their efforts to avoid tax obligations, these dodgy directors escape paying staff, contractors and suppliers by transferring a company’s assets to a newly created company, then liquidating the original company.
Workers, or indeed anyone who suspects phoenix activity – indicated for example by failure to pay employee entitlements and invoices – should report such behaviour on a newly opened Phoenix hotline 1800 807 875, or online at ato.gov.au/reportphoenixactivity.
There is widespread support among business owners for change best accomplished by a double-edged campaign. They believe all directors should henceforth be required to apply for an identification number (DIN), and that the Government should be committed to consultation with business owners on a range of other changes that would extend the Australian Tax Office’s (ATO’s) powers -- including options to increase penalties for non-compliant taxpayers.
Important areas for focus
Our belief is that consultation should focus on specific laws to stop phoenixing and these should be extended to include penalties for people who devise and promote tax avoidance schemes.
There appears also to be strong support from businesses wanting to see the ATO being given power to claim a security deposit from company directors who are suspected of phoenix activity and seeking to start a new business – especially if it’s one in the same industry as a company they’re liquidating or have recently liquidated.
Furthermore, it’s understood the Government is considering giving the ATO the right to withhold tax refunds in certain circumstances, and to launch immediate action to recover tax debts where directors have been issued with Director Penalty Notices (DPNs).
Certainly it would seem that if proposed reform legislation is to be effective, legitimate behaviour by directors in dealing with corporate debt in situations where they should be held personally responsible for it, must be sharply defined.
In this context:
- Circumstances in which company GST liability should be included in directors’ debt responsibilities needs also to be determined.
- “Related entities” to a phoenix operator must henceforth be prevented from appointing a liquidator to a business.
- And it appears there would be widespread support in the business community for it to be unlawful for a director to backdate a resignation to escape personal liability, or by resigning, leave a company without any directors.
Indications from the Government
In response to representations from the Productivity Commission, and from consultation with business organisations to date, the Government has indicated it will give “in principle” support for a revised, simplified “small liquidation” process for companies with liabilities of less than $250,000.
However, it has rejected a Commission recommendation that company administrators be required by law to decide within a month of appointment whether businesses are capable of long term survival.
The Commission had argued an administrator should be able, in this time, to determine accurately whether a business would survive “in the long run”. If the decision was that it couldn’t, the Commission wanted the business liquidated without delay.
Sources tell us the Government believes the Commission’s recommendation, if implemented, would “fundamentally change the purpose of administration, namely to explore all possible means of reconstructing a business”.
In any case Macks Advisory’s view, forged in substantial experience, is it’s simply wrong to assume administrators can always, within a month, unfailingly determine whether or not a collapsed business can be reconstituted for long term survival.
For instance, an administrator, half-way through the month for viability assessment, might well be presented with a salvage plan from a major stakeholder. Alternatively, a previously unknown and unexpected “white knight” could come forward with a potentially vital proposition. In these circumstances an administrator could necessarily require more than a fortnight to determine whether what these people were willing to do for the business, would ensure its survival.
This reform saga continues and we’ll keep you updated.