The Federal Government has recently passed new legislation further strengthening its ability to combat illegal phoenix activity and those who engage in it.

Illegal phoenix activity has been described by the Australian Securities & Investments Commission as being where a new company is created to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding debts, including creditors, taxes and employee entitlements. This often involves directors transferring the assets of an existing company to a new company without paying true or market value, leaving debts with the old company, after which, when the old company is placed in liquidation, there are no assets for the liquidator to sell to pay creditors.

In the 2018-19 Budget, the Government announced a package of reforms to the corporations and tax laws to combat illegal phoenix activity. The proposed reforms included a range of measures to both deter and disrupt illegal phoenixing and more harshly punish those who engage in and facilitate this activity.
As a result of those proposed reforms, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (the “Act”) recently received Royal Assent on 17 February 2020.

The Act has introduced the following four measures to combat illegal phoenix activity:

• New phoenixing offences and other rules about property transfers to defeat creditors;
• Making company directors personally liable for the company’s GST liabilities;
• Improving the accountability of resigning directors; and
• Allowing the ATO to retain tax funds in certain circumstances.

GST Estimates and director penalties

Schedule 3 of the Act 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.

The pre-existing director penalty regime made directors of a company personally liable for specified taxation liabilities of the company in certain circumstances of non-payment by the company. Under section 269-10, the director penalty regime applied to a company’s liabilities to pay to the Commissioner: PAYG withholding amounts; superannuation guarantee charges; and estimates of PAYG withholding liabilities and superannuation guarantee charges.

Directors were subject to a penalty if their obligation is unfulfilled by the due date, and new directors that are appointed after the due date, become subject to the penalty if the obligation remains unsatisfied for a further 30 days.

The new legislation now expands upon the pre-existing director penalty regime to enable the Commissioner to collect estimates of anticipated GST liabilities, including LCT and WET liabilities. The Commissioner can also recover director penalties from company directors to collect outstanding GST liabilities, including LCT and WET liabilities, and estimates of those liabilities.