House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Housing and Assistant Treasurer, the Hon. Michael Sukkar MP)

Chapter 1 Combating illegal phoenix activity

Introduction

1.1 This Chapter outlines the issues associated with illegal phoenix activity and its impact on creditors, employees, government revenue and the broader economy. This Chapter also outlines the Government's response to illegal phoenix activity, including the amendments contained in the Bill.

Illegal phoenix activity

1.2 Phoenix activity is not defined in legislation and can encompass both legitimate business rescue activities and the use of serial deliberate insolvency as a business model to avoid paying company debts.

1.3 While the scale of illegal phoenix activity ranges from the opportunistic to the systemic, a common characteristic is the stripping and transfer of assets from a company to another entity. Such transactions are carried out by a company's directors or other controlling minds with the intention of defeating the interests of the first company's creditors in that company's assets. Such transactions are also facilitated by others, including unscrupulous pre-insolvency advisers, accountants, lawyers or other business advisers, who advise companies on how to engage in illegal phoenix activity.

1.4 Illegal phoenix activity was a significant issue explored in the Senate Economics Reference Committee's 2015 inquiry into Insolvency in the Australian construction industry . A July 2018 report by PricewaterhouseCoopers, prepared for the Phoenix Taskforce, estimated the annual direct cost to businesses, employees and government as a result of potential illegal phoenix activity to be between $2.85 billion and $5.13 billion in 2015-16.

1.5 Those affected by illegal phoenix activity include employees of the original failed company, other businesses and contractors who are owed money because they have supplied goods and services, and statutory bodies such as the ATO. It also gives phoenix companies an unfair advantage over their competitors, damaging the competitive process.

The Government response

1.6 The Australian Government has committed to ongoing reform of Australia's corporate insolvency regime. The Bill contains a package of measures aimed at countering illegal phoenix activity and marks the Government's third tranche of insolvency law reforms.

1.7 The first tranche, contained in the Insolvency Law Reform Act 2016 , modernised the corporate reorganisation framework around the registration, remuneration and regulation of insolvency practitioners to improve confidence in the corporate insolvency regime and reduce associated costs.

1.8 The second tranche, introduced as part of the National Innovation and Science Agenda, focussed on supporting honest business restructuring. The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) 2017 Act introduced a safe harbour for directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency. From 1 July 2018, it also made ipso facto clauses (that allow contracting parties to immediately terminate agreements with a company when an insolvency event occurs) unenforceable if the company is undertaking a formal restructure.

1.9 The Bill implements four measures to combat illegal phoenix activity that were announced in the 2018-19 Budget:

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Schedule 1 introduces new phoenix offences to prohibit creditor-defeating dispositions of company property, penalise those who engage in or facilitate such dispositions, and allow liquidators and ASIC to recover such property (see Chapter 2);

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Schedule 2 ensures directors are held accountable for misconduct by preventing directors from improperly backdating resignations or ceasing to be a director when this would leave the company with no directors (see Chapter 3);

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Schedule 3 allows the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company's GST liabilities in certain circumstances (see Chapter 4); and

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Schedule 4 authorises the Commissioner to retain tax refunds where a taxpayer has failed to lodge a return or provide other information that may affect the amount the Commissioner refunds. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund (see Chapter 5).

1.10 The fifth and final element of the Budget package prevents related creditors facilitating illegal phoenix activity by unduly influencing voting at creditor's meetings in an external administration. This is implemented through the Insolvency Practice Rules (Corporations) Amendment (Restricting Related Creditor Voting Rights) Rules 2018 , which commenced on 7 December 2018.

1.11 The measures in the Bill build on other actions taken by the Government to combat crime and fraud occurring in the economy, including:

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instituting the Black Economy, Serious Financial Crime and Phoenix Taskforces;

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establishing a dedicated team to drive implementation of the extensive work program arising from the Government's response to the Black Economy Taskforce Final Report;

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establishing a Black Economy Advisory Board made up of private and public sector members who will provide strategic advice on trends and risks in the black economy;

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introducing a stronger penalty framework to protect consumers from corporate and financial sector misconduct;

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initiatives to curb the excessive drain on the taxpayer funded Fair Entitlement Guarantee scheme, which covers employees' entitlements left outstanding as a result of failed business enterprises;

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the package of reforms in Schedule 5 to the Treasury Laws Amendment (2018 Measures No. 4) Act 2019 that targets employers who fail to meet their superannuation guarantee obligations;

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legislating to enable information sharing between key regulatory agencies;

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improving the collection of GST on new residential premises and residential subdivision transactions and introducing a reverse charge to prevent GST fraud in the precious metals industries ;

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phasing in near real time reporting by employers of payroll and superannuation information to the ATO through the single touch payroll reporting framework;

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the prohibition of the manufacture, distribution, possession, use or sale of electronic point of sale sales suppression technology and software;

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consulting on improving the transparency of beneficial ownership information of companies, and making the information available to key regulators for enforcement purposes; and

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developing and improving legislation to encourage and protect whistleblowers.

Government taskforces

1.12 In order to develop an effective, whole-of-government response to the illegal phoenix problem, the Government established a number of taskforces to facilitate cross-agency co-operation and enforcement.

1.13 The Government established the Phoenix Taskforce in 2014, and the Serious Financial Crime and Black Economy Taskforces in 2015 and 2016 respectively. The Taskforces have each focussed on combating illegal phoenix activity and have provided extensive advice to Government.

Phoenix Taskforce

1.14 The Government's on-going Phoenix Taskforce comprises 32 Federal, State and Territory government agencies and provides a whole-of-government approach to combating illegal phoenix activity.

1.15 The Phoenix Taskforce is a crucial player in countering illegal phoenix activity, and has reported to the Government that the detection, deterrence and disruption activities undertaken by Phoenix Taskforce agencies are starting to have an impact on the problem. The Phoenix Taskforce has also contributed to the development of law reform proposals, including the reforms in this Bill.

Serious Financial Crime Taskforce

1.16 The Serious Financial Crime Taskforce is part of the Australian Federal Police-led Fraud and Anti-Corruption Centre. The Taskforce, which includes ASIC, the Australian Transaction Reports and Analysis Centre, the ATO and other Commonwealth agencies, is responsible for investigations and prosecutions for serious and complex financial crimes including illegal phoenix activity.

Black Economy Taskforce

1.17 The Government established the Black Economy Taskforce to develop an innovative, forward-looking and whole-of-government policy response to combat the black economy in Australia.

1.18 The Government released the final report of the Black Economy Taskforce and the Government's response on 8 May 2018. The final report highlighted the harm the black economy causes to honest businesses and the community, penalising honest taxpayers, undermining the integrity of Australia's tax and welfare systems and creating an uneven playing field for the majority of compliant small businesses.

1.19 In the 2018-19 Budget, the Government announced a package of reforms to address the black economy, including:

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Consulting on modernising and strengthening the Australian Business Number system;

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a comprehensive strategy to combat illicit tobacco;

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the introduction of an economy-wide $10,000 cash payment limit;

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restricting government procurements over $4 million to businesses that have satisfactory tax records;

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$318.5 million in additional funding to the ATO to implement a new and enhanced enforcement strategy to combat the black economy;

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a further expansion of the taxable payments reporting system and consultation about extending similar reporting to the sharing economy; and

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removing the tax deductibility of non-compliant payments.