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Tax Alert: Company directors under the microscope

In the May Federal Budget, several initiatives were announced to assist with the recovery of unpaid tax liabilities lost when a company is shutdown, including changes to the collection of GST on the sale of new residential property. Late last week, the Minister for Revenue and Financial Services, The Hon Kelly O’Dwyer MP, announced further significant changes to the Director Penalty Regime, in an attempt to wipe out what is known as “phoenix” activity.

What is phoenix activity?

Phoenix activity is the practice of stripping assets out of a company into a “clean” entity in an effort to defeat creditors, including any tax obligations. The Federal Government estimates that this activity costs the Australian economy up to $3.2 billion each year!

What was the announcement?

The Minister has announced a number of changes to the Director Penalty Regime to allow more stringent penalties to apply to individuals attempting to undertake illegal phoenix activity. It is important to note that while the measures are intended to target phoenix activities, directors of all companies will be affected by the changes and should ensure they understand their obligations.

What are the changes?

The changes announced include:

  • The introduction of a Director Identification Number (DIN) to allow personal information about Directors to be tracked more efficiently
  • Outlining specific phoenixing offences allowing regulators to take decisive action
  • The extension of penalties to advisers and promoters of phoenix activity
  • Stronger powers for the Australian Tax Office (ATO) to obtain and hold security deposits from suspected phoenix operators to allow for the recovery of potential tax liabilities
  • Allowing the ATO to withhold tax refunds from suspected phoenix operators or high risk individuals as a preventative measure
  • Making directors personally liable for outstanding GST obligations (in addition to existing powers of PAYG Withholding and superannuation)
  • The introduction of restrictions on directors resigning from their position
  • Preventing entities related to the phoenix operator from appointing a liquidator

Why has this announcement been made?

The Federal Government have made this announcement as part of a suite of reforms to crack down on fraud and other crime in the economy, including:

  • The establishment of the Phoenix, Black Economy and Serious Financial Crime Taskforces
  • Strengthening disciplinary rules for insolvency practitioners
  • Legislating to improve information sharing between key regulatory agencies
  • Reviewing and enhancing ASIC’s powers and enforcement tools
  • Consulting on law reform initiatives to curb the excessive drain on the taxpayer funded Fair Entitlement Guarantee scheme
  • Improving the collection of GST on property transactions from 1 July 2018
  • Consulting on a register of beneficial ownership of companies

What does this mean now?

Right now there has only been a Ministerial Announcement, however this will progress to consultation in the coming weeks. At this point in time there are no discussion papers or draft legislation to review … but watch this space!

What’s next?

If you are seeking guidance about your obligations as a Director, or confirmation that your actions will not constitute phoenix activity, please contact your Fordham Partner for a confidential discussion.

This publication has been prepared by Fordham Business Advisors Pty Ltd and Perpetual Trustee Company Limited ABN 42 000 001 007, AFSL 236643 (PTCo). Fordham is part of the Perpetual Limited Group. Perpetual Private advice and services are provided by PTCo. This information is believed to be accurate at the time of compilation and is provided in good faith. However, it contains general information only and is not intended to provide you with advice or take into account your personal objectives, financial situation or needs. You should consider whether the information is suitable for your circumstances and we recommend that you seek professional advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.