Recent amendments to tax legislation have seen a significant boost to the Commissioner’s powers to recover unpaid taxes.
The Tax Laws Amendment Act 2010 has given the ATO a very wide discretionary power to demand security deposits or bonds from taxpayers as part of securing likely or expected tax obligations. This can include taking equitable or registered mortgages over real property and fixed and floating charges over companies.
While the public message is that the new powers are designed primarily to provide security for payments due by taxpayers who are thought to be leaving the jurisdiction, the legislation contains no such limitations. It’s readily applicable to any taxpayer the Commissioner deems warranting further security.
Not surprisingly, the legislation comes at a time of increased vigilance by both the ATO and ASIC in respect of what is commonly referred to as ‘phoenix’ activity. While the term itself is well known, ask the Commissioner to provide a description of what it views as phoenix activity and you’re likely to be met with the sound of one hand clapping. It seems it’s much the same as pornography; ‘I can’t describe it, but I know it when I see it’.
Some estimates place the cost of suspected phoenix activity at around $600 million. If so, it’s no surprise such nefarious behaviour has the tax man’s attention. Perhaps an example might better explain a phoenix operation.
Say ‘Gone for Broke Pty Ltd’ is facing income and GST liabilities of $500,000. Trade creditors and other costs of doing business are under control and up to date. Unfortunately, while GFB has sufficient debtors to continue trading into the foreseeable future, it has nowhere near enough to meet the overdue liability to the Commissioner. As it can not meet all of its debts as and when they are due, it is insolvent.
Sam Grabbit, GFB’s director, is in survival mode. He and his wife have no disposal money but naturally want to secure they’re source of income. On a flash of genius in the shower, he transfers all the assets of the company together with phone numbers, staff, client lists and other confidential information and intellectual property into a new entity called Rise Again Pty Ltd.
The transfer of assets is carried out for no consideration or for significantly less than their actual market value. In doing so, Grabbit leaves creditors (particularly the tax man) with an empty shell of the old company and the assets removed beyond their reach. Rise Again Pty Ltd carries on doing business, literally ‘rising from the ashes’ of the old company – the fabled ‘phoenix’.
The ATO and ASIC make regularly comments about the illegality of such conduct. Of course, there are a number of bases upon which a liquidator of GFB could recover the assets but in most cases he or she has little funds with which to pursue the evildoer, who then goes unpunished.
The introduction of bonds or security as another recovery tool by the ATO increases the risk to directors acting in such a fashion. Moreover, it also serves to return the Commissioner to the old days where he had priority over all other unsecured creditors. The effect of bonds, particularly fixed and floating charges or mortgages, will grant the Commissioner priority in any distribution and to the company’s assets over practically all unsecured creditors of the company. Not surprisingly, directors will also stand to lose more than their share capital.
The Act grants the ATO power, at any time, to require such security deposits as the Commissioner considers appropriate.
How the Commissioner intends to utilise his new power remains to be seen. However, as with any of the Commissioner’s enforcement action, a speedy response and intervention can often obviate or mitigate the damage. Bond Notices, Director’s Penalty Notices and statutory demands all have their weaknesses, but only if dealt with in a timely fashion