Madison Marcus | Laws to Stop Phoenix Activity are in Sight - Madison Marcus

Laws to Stop Phoenix Activity are in Sight

The Government is cracking down on illegal phoenix activity by legislating a package of reforms to the corporations and tax laws that will have a significant impact on directors, pre-insolvency advisors and businesses.

Illegal phoenix activity occurs where the directors/ shareholders (or controllers) of a company strip its assets by transferring them to another company in order to avoid paying creditors.

This activity is estimated to cost creditors between $3 billion and $5 billion per year in bad debt and taxes.

The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2018 is one of the proposed reforms that will:

  1. introduce civil and criminal offences for directors, pre-insolvency advisers (including lawyers and accountants) and individuals who assist or facilitate illegal phoenix activity. Some of the offences will include:
    1. a company director engaging in creditor-defeating transfers which prevent a creditors’ access to those assets;
    2. any other party assisting or facilitating in creditor-defeating transfers will also be liable;
    3. there will be an extension of the existing liquidator clawback avenues;
  2. impose the following penalties:
    1. for individuals:
      1. 4,500 penalty units ($945,000) or three times the benefit gained; or
      2. imprisonment for 10 years; or
  • both civil and criminal penalties;
  1. for corporations:
    1. 45,000 penalty units ($9,450,000) or three times the benefit gained; or
    2. 10 percent of the annual turnover of the entity.
  2. impose restrictions on director resignations to prevent them from avoiding personal liability;
  3. make directors personally liable for GST liabilities in certain circumstances;
  4. extend the ATO’s existing power to retain funds where there are outstanding tax lodgements.

The proposed legislation is aimed at those who are engaging in illegal activity and is not intended to hinder legitimate transactions.

However, we recommend you always remain cautious and aware of your obligations to creditors when engaging in any restructuring activities in your business. It is also essential that  if you are a professional advisor that you are vigilant when advising others about  restructuring as you may be personally liable for breaches.

If you have any further questions about the proposed legislation or would like advice on restructuring your business, please do not hesitate to contact Rolf Koops, Taxation Partner on (02) 8022 1222.

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