The Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill 2019 (Bill) has passed through the Parliament.
The Bill forms part of the Government’s insolvency law reforms and is intended to counter illegal phoenix activity (involving the transfer of assets from one company to another by individuals or entities to avoid paying debts).
It introduces a number of significant reforms that apply to all directors, including reforms that:
- restrict back-dating of resignations (any late lodgement of resignation to ASIC will now be taken to apply from the date the notice was received by ASIC);
- prevent directors from resigning if the resignation would leave the company without a director; and
- extend the director liability regime to cover a company’s GST liabilities in certain circumstances.
The AICD has been closely engaged on the relevant reforms, and has made a number of submissions on the Bill, including to the Senate Economics Legislation Committee which considered the Bill in early 2019 (see here).
We strongly support the goal of deterring and disrupting illegal phoenix activity, and acknowledge the significant harm that illegal phoenixing causes to creditors, employees and other stakeholders, along with the broader economy. However, our consistent view has been that more proactive policing and enforcement of existing law is critical to combatting illegal phoenixing. This will continue to be the case, notwithstanding the passage of new laws.
For directors, key changes to be aware of include:
Limiting backdating of director resignations
The Bill amends the Corporations Act to limit the “backdating” of director resignations by providing that any late lodgements of resignation to ASIC (i.e. those received after 28 days of the date of the director’s resignation) would instead be taken to apply from the date the notice was received by ASIC.
Either the director or company could apply to ASIC or the court to backdate a resignation to the “actual” effective date, and in doing so must satisfy ASIC or the Court that the director did in fact resign on the purported date.
If the application is made to ASIC, it must be made within 56 days of the purported date of resignation. Applications to the Court can be made within 12 months of that date (or at a later time allowed by the Court).
The intent is to limit the scope for those seeking to misrepresent resignation dates in order to limit their accountability for illegal phoenix activity.
Directors will wish to ensure they are comfortable with the administrative processes in place to notify ASIC of director resignations, particularly where they are relying on the company to lodge the relevant paperwork.
Abandonment of companies
In order to prevent the “abandonment” of companies, the Corporations Act now provides that a director may not resign if the resignation would leave the company without a director.
To accommodate temporary absences of a director, the amendment applies at the end of the day on which the director purports to resign. If another director is appointed the same day as the resignation, the resignation is effective.
A single director may resign or be removed if the company is being wound up at the time.
GST estimates and director penalties
In a significant reform, the Commissioner of Taxation is now able to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities (through the director penalty regime) in certain circumstances. The reforms also apply to luxury car tax (LCT) and wine equalisation tax (WET) (both jointly administered with GST).
The director penalty regime already applies to a company’s liabilities to pay PAYG withholding amounts, superannuation guarantee charges, and estimates of PAYG withholding liabilities and superannuation guarantee charges.
The AICD strongly opposed this reform and made multiple representations to Government. We argued that it was inappropriate, without a compelling justification, to expand personal liability for all directors rather than targeting those criminals and companies engaged in misconduct.
Ultimately, more targeted solutions were not preferred by the legislature.
Notably, prior to the passage of the Bill, the ATO issued a draft Practical Compliance Guideline on how it intends to administer the legislative changes.
The draft Guideline provides that the GST, LCT and WET estimate provisions will only be applied in limited circumstances including where there are reasonable grounds to believe that the taxpayer, or related entities, are involved in phoenix behaviour, or assets are being dissipated with the intention to defeat creditors or other action is being taken to defeat creditors (which may be a precursor to phoenixing).
While we made a number of suggestions to the ATO on areas where the Guideline could be strengthened, we broadly welcomed the intent. It should give directors comfort that the changes will only be applied in limited circumstances.
New “phoenix” offences and civil penalties introduced
New provisions that prohibit “creditor-defeating dispositions” of company property, penalise those who engage in or facilitate such dispositions, and allow liquidators and ASIC to recover the relevant property have also been introduced.
Notably, the amendments introduce new criminal offences and civil penalty provisions for:
- company officers that fail to prevent the company from making creditor-defeating dispositions; and
- other persons that facilitate a company making a creditor-defeating disposition.
Reforms relating to creditor defeating dispositions and director resignations will come into effect the day after the Bill receives Royal Assent.
The new provisions in relation to GST estimates and director penalties will come into effect on 1 April 2020.
Update on director identification numbers
Separately, the Government remains committed to introducing director identification numbers (DINs) as part of its Modernising Business Registers (MBR) reforms.
The AICD has endorsed this commitment. The DINs framework should enable all current and previous corporate activity and taxation compliance by prospective directors to be tracked and enforcement appropriately targeted. Identity verification requirements, and more visible enforcement action, would make use of so-called “dummy directors” or use of fraudulent identities much more difficult for those seeking to engage in illegal phoenix activity.
The MRB legislation was re-introduced in December and is awaiting further debate. We will continue to keep members updated.
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