ATO and Phoenix Activity

Readers of this newsletter will be aware that both the Australian Securities & Investments Commission (“ASIC”) and the Australian Taxation Office (“ATO”) regularly investigate “Phoenix Transactions”. 

Illegal phoenix activity refers to the deliberate liquidation of a business entity following the transfer of assets or the business entity as a whole for little or no consideration.  It is usually done to avoid financial obligations without risking the operator’s assets and with the intention of resuming business through a new entity.

Acting Commissioner of Taxation, Mr Will Day, recently announced that phoenix activity is costing honest businesses almost $2 billion in unpaid debts etc. In addition, he stated that employees of phoenix operators are losing up to $655 million in unpaid wages and entitlements such as superannuation.

The ATO has announced it is to lead a prescribed crime task force into Phoenix Activity.

A prescribed task force is one which allows the sharing of tax related data and intelligence between the various agencies which are members of that task force.

The task force is to assist in the prosecution of parties who are involved in phoenix transactions and the recovery of taxes and penalties resulting from those prosecutions.

The taskforce will comprise officers from the ATO, ASIC, the Fair Work Ombudsman, Fair Work Building and Construction, Department of the Environment, the Department of Employment, Department of Immigration and Border Protection and NSW and Victorian Offices of State Revenue.

The ATO will use a number of indicators to target businesses for investigation (eg. entrepreneurs who regularly liquidate companies leaving large GST liabilities).

In a regular update on taxation matters the ATO reported it has identified over 2000 property developers who have placed companies in liquidation on multiple occasions with outstanding GST obligations.

ATO ENFORCEMENT AND RECOVERY

In his address at the Taxation Institute 30th Annual Convention the Commissioner (Mr Chris Jordon) stated that the mission of the ATO is to contribute to the economic and social well being of Australians by fostering willing participation in the tax and superannuation systems.

The Commissioner indicated that he is seeking the voluntary support of individuals and corporate entities to meet their taxation liabilities.

However, where taxpayers fail to meet their obligations the Commissioner advised that thresholds at which legal action would be commenced for recovery had been reduced for individuals from $300,000 to $35,000 and for corporations from $340,000 to $93,000.

It is anticipated that this will lead to a significant increase in the number of legal actions brought for recovery of outstanding tax debts.

The ATO is ramping up its enforcement processes to reduce the burgeoning debt levels due to the ATO.  In particular its right to garnishee debts and cash due to, or held on behalf of, a company.

A garnishee notice has the effect of creating a charge in favour of the ATO in priority to any existing charges granted by the Company.  It does not require registration on the Personal Property and Securities Register (“PPSR”) as it is a statutory charge.

Garnishee notices, even when issued within the six (6) months review window open to liquidators, cannot be overturned (as these statutory notices are not subject to the preference provisions of the Corporations Act, 2001 (Cth) (“the Act”)).  Liquidators therefore have no rights of recovery against the ATO where funds have been received following the issuance of a garnishee notice.

The issue of garnishee notices may also have a detrimental effect on the ability of a company to meet its commitments to creditors by diminishing the quantum of debtors and cash available to meet those commitments.

Directors are unlikely to “advertise” that a garnishee notice has been issued by the ATO due to the negative effect this would have in ongoing trading and the provision of credit by suppliers.

It is also important that, directors be aware of the automatic liability and Director Penalty Notice (“DPN”) provisions of the Income Tax Assessment Act, 1936 as amended (“ITAA”).

Directors attract automatic personal liability for certain taxation and superannuation liabilities three (3) months after the due date where the relevant returns have not been lodged with the ATO.

For PAYG – the due date is 21 days after the end of the reporting period.

For SGC – the due date is the 28th day of the second month after the end of the reporting period (eg. For the reporting period ended 31 March, the due date is 28 May).

If the necessary returns are lodged but the relevant liabilities remain unpaid, the ATO may still issue a DPN, however personal liability is not automatic and may be avoided by making a payment arrangement with the ATO or taking certain actions in respect of the Company. 

This legislation is complex and directors should seek professional advice in respect of their obligations and potential liabilities.  However, directors should ensure that returns are lodged on time to limit their personal exposure in respect of PAYG and SGC debts to the ATO.

TRUSTEE INDEMNITY WHEN TRUSTEE IS INSOLVENT

A trustee of a trust has an indemnity from the assets of the trust in respect of liabilities incurred in its capacity as trustee.

The inclusion in a trust deed of a provision which automatically removes a corporate trustee upon the appointment of an insolvency practitioner to the trustee does not remove the indemnity which the practitioner has against the assets of the trust for liabilities incurred by the former trustee on behalf of the trust.

This issue was considered in an action brought by Mike Smith, a partner of this firm as Liquidator of Stansfield DIY Wealth Pty Ltd (In Liquidation).  In the matter of Stansfield DIY Wealth Pty Ltd (In Liquidation) [2014] NSWSC 1484 Brereton J stated:

“Where the trustee is removed and replaced, the outgoing trustee retains a right of indemnity from the trust assets, secured by an equitable charge over them, for its liabilities incurred by reason of acting as trustee….  However, the equitable lien securing the trustee’s right of indemnity and exoneration does not of itself give the former trustee a power of sale, rather, it is a security which is enforceable by the trustee only by judicial sale or appointment of a receiver with a power of sale ….”

This decision was endorsed and quoted more recently in the matter of Mecfab Holdings Pty Ltd [2015] NSWSC 46

A new trustee appointed should be aware of this indemnity and make provision for liabilities incurred by the former trustee (but which remain unpaid) prior to dealing with the assets of the trust.  Liquidators of corporate trustees are increasingly applying for court orders for a judicial sale of assets or appointment of a Receiver and Manager with power of sale to both protect and dispose of trust assets to meet the liabilities incurred by the former trustee.