ATO Crackdown on Illegal Phoenix Activity

David Clout and Associates / November 11, 2016

ATO Crackdown on Illegal Phoenix Activity
(Beware of Strangers Offering “Gifts”)

The Australian Tax Office (ATO) defines fraudulent phoenix behaviour as:

‘The evasion of tax and/or superannuation liabilities through the deliberate, systematic and sometimes cyclic liquidation of related corporate trading entities.’

Such activities effectively strip a company of assets which are then transferred to a new entity (usually related), leaving all of the debts, including tax and employee entitlements behind, whilst the new entity rises like a phoenix from the ashes of the old company to be liquidated and reaps all of the benefits, but without the previous debt burden and obligations.

In an effort to crack down on such illegal behaviour, both the ATO and the Australian Securities and Investments Commission (ASIC) have conducted raids by sending some 120 officers to conduct raids on 13 businesses and residences nationally (Gold Coast and Melbourne) to seize documents to identify and prosecute those firms referred to as “pre-insolvency” firms, which advise clients on how to avoid tax and encourage other illegal behaviour, which passes significant costs to the Australian economy, estimated to be in excess of $3 billion.

Following ASIC’s investigations and subsequent proceedings, Stephen Charles Hall of Eagle Business Solutions was convicted and charged of dishonestly aiding, abetting, counselling and/or procuring another director to breach their director duties. Hall was fined and automatically disqualified from managing a corporation for 5 years, whilst directors participating in the illegal activity themselves, now also face prosecution.


Lessons for Directors and their Advisors
(Choose Qualified Professionals & Liquidators Carefully)

According to The Australian, the ATO and ASIC believe that “pre-insolvency” firms use public databases to identify and target struggling companies, then cold-call them to offer “pre-insolvency” advice, which often includes “phoenix” strategies which may result in directors also being prosecuted. So concerned is ASIC by this trends, it has taken the unprecedented step of advising company directors to be aware of such unscrupulous operators and confirms it will continue to work with other government agencies to disrupt misconduct and enforce the law. The ATO will also fund liquidators to pursue suspected misconduct and increase its surveillance via more data matching and unannounced “access visits.

ATO deputy commissioner Michael Cranston acknowledges that “Unlike registered liquidators, these self-proclaimed ‘pre-insolvency specialists’ operate in an unregulated environment. Whilst liquidators are heavily scrutinised by the regulators and creditors alike, there are generally no consequences for unqualified “pre-insolvency” advisors giving bad advice.

John Winter, CEO of the Australian Restructuring Insolvency & Turnaround Association, also confirms that businesses should seek advice from qualified practitioners if their businesses encounter financial trouble. “Businesses need to get advice early before they hit the rough part of these troubled waters, and it’s important people go to the right space for this advice,” Winter says. “A lot of pre-insolvency advice is given by people who don’t have much experience, and they’ll give advice that goes against the law. “They offer the impossible, and the panicked and desperate business owner thinks that’s very attractive.

For companies facing financial difficulty and directors seeking to limit personal liability and protect personal assets, there are numerous legal ways to go about this without resorting to illegal methods which run the risk of fines, imprisonment or both. At DCA we have over 30 years experience in corporate and personal turnaround, restructuring and insolvency, and by discussing your options with highly experienced and qualified registered practitioners, you can be assured of receiving the right advice about your options to minimise your risk.

Contact us for an obligation free consultation if you are experiencing financial difficulties so that we can guide you through your options.

Media releases by ASIC and others can be viewed here