Turnbull Government cracks down on phoenix directors


Company directors will be issued with unique identification numbers as part of Federal Government reforms designed deter and penalise directors who engage in illegal phoenixing activity.

The reforms were announced this week by Minister for Revenue and Financial Services, Kelly O’Dwyer, who said illegal phoenixing – the stripping and transfer of assets from one company to another by individuals or entities to avoid paying liabilities – costs the economy up to $3.2 billion per year.

Minister O’Dwyer said the government’s package of reforms will include the introduction of a Director Identification Number (DIN), which will identify directors with a unique number. The DIN will interface with other government agencies and databases to allow regulators to map the relationships between individuals and entities and individuals and other people.

In addition to the DIN, Minister O’Dwyer said the government will consult on implementing a range of other measures to deter and disrupt the core behaviours of phoenix operators, including non-directors such as facilitators and advisers. These include:

  • Specific phoenixing offences to better enable regulators to take decisive action against those who engage in this illegal activity;
  • The establishment of a dedicated phoenix hotline to provide the public with a single point of contact for reporting illegal phoenix activity;
  • The extension of the penalties that apply to those who promote tax avoidance schemes to capture advisers who assist phoenix operators;
  • Stronger powers for the ATO to recover a security deposit from suspected phoenix operators, which can be used to cover outstanding tax liabilities, should they arise;
  • Making directors personally liable for GST liabilities as part of extended director penalty provisions;
  • Preventing directors from backdating their resignations to avoid personal liability or from resigning and leaving a company with no directors; and
  • Prohibiting related entities to the phoenix operator from appointing a liquidator.

Minister O’Dwyer said the government will also consult on how best to identify high risk individuals who will be subject to new preventative and early intervention tools, including:

  • a next-cab-off-the-rank system for appointing liquidators;
  • allowing the ATO to retain tax refunds; and
  • allowing the ATO to commence immediate recovery action following the issuance of a Director Penalty Notice.

Minister O’Dwyer advised that consultation on the non-DIN measures will commence in the coming weeks.

Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell expressed support for the introduction of DIN as a means of ensuring “rogue directors” can’t be involved in multiple instances of phoenixing.

“When companies phoenix it’s usually the subcontractors and small businesses who suffer; they’re the ones who aren’t paid,” she explained.

“This is a definite step in the right direction to ensure that small businesses get a fair go. The challenge for the government is to ensure this is not just another number with more red tape. We’ve already got an ACN, ABN, a TFN and many licences and regulatory requirements for businesses. We want to see a scenario where all of this data is consolidated into a single portal that contains all relevant information.”

Mark Molesworth, Tax Partner with accountancy firm BDO Australia, said the proposed measure preventing directors from resigning where that will leave no directors for an entity, “may lead to a ‘last director standing’ rush in situations where a company is showing signs of failure”.

He explained, “That is, compared to the current law, directors may be more likely to want to resign earlier because, if they happen to be the last director, they will not be able to resign. This also has implications where the directors of a company fall out with the shareholders and the board is spilled.”

Molesworth said BDO supported the introduction of the DNO “if done well”, adding that unless the security of the DIN system is “first rate”, the government will run the risk of identity fraud.

Molesworth described the extension of the director penalty notice regime to GST liabilities as “troubling”, noting that it:

  • “militates against ordinary businesses and directors having a ‘licence to fail’ – which the government itself acknowledges is important in encouraging entrepreneurship and innovation.
  • “makes the government more likely to collect money out of an insolvency than ordinary creditors and, in some cases, employees.”

“The other proposed measures appear to be reasonable responses to perceived issues,” he said. “As always, the devil will be in the detail. We will be participating in the consultation to attempt to ensure that the rules strike the right balance between penalising criminal behaviour and not stifling entrepreneurship.”