Phoenixing is a big problem for small business, but what can be done about it?
Illegal Phoenix activity is when a business does not pay its debts, and goes into liquidation to avoid paying these debts, but continues to trade under a different business name leaving the creditors and employees of the previous entity without payment. This sort of activity has a significant impact on individuals, other businesses and the community and the ATO are working via the Black Economy Taskforce to prevent this illegal activity from happening.
Some signs to look out for relating to Phoenixing include:
If you notice any of these signs with your employers, as a tax professional you should carefully consider your next steps taking into consideration your requirement to maintain client confidentiality under the TPB Code of Conduct, please refer to our previous article on this.
- Employee entitlements not being paid
- Wages being underpaid or paid late
- A high level of creditor payments overdue
- A change in business name whilst continuing to trade
- Quotes that are constantly well below that of competitors
So, what can be done about it?
Minister for Financial Services, Kelly O’Dwyer has recently announced the launch of a Phoenix hotline for impacted creditors and employees to report suspect activity. The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, said that the Phoenix hotline will not protect small businesses falling victim to illegal Phoenix activity as they are most often unsecured creditors and at the bottom of the list in terms of being paid when insolvency action is taken.
“By the time action can be taken against companies and their directors, what little money is left will go directly to secured creditors, such as the ATO and the banks,” said Ms Carnell.
“And eligible employees will have their wages paid by Fair Entitlements Guarantee – a legislative safety net scheme to pay employees who lose their jobs due to the liquidation or bankruptcy of their employer,
“One way of protecting some small businesses is to enact John Murray’s building and construction industry recommendations; particularly, a deemed statutory trust set up for projects over $1 million.
“Money would be quarantined in a separate legislated account and would not be available for use by the company. It would be used to pay the people who did the work – the subcontractors.
“As we know, the construction industry has a track record of poor payment practices, insolvency and phoenixing, so statutory trusts will go some way to alleviate subcontractors and other small businesses not being paid as the result of phoenix activity.
“We also support a unique director identifier so crooked directors can’t be involved in multiple instances of phoenixing.
“Let’s level the playing field for small businesses suffering at the hands of Australia’s phoenixing and provide some real protection for them, because it’s costing the small business sector a lot of money too,” said Ms Carnell.
AAT wholeheartedly support Ms Carnell’s suggestions. We strongly suggest that you are vigilant in looking out for your contractors who are working with businesses who are showing some of the warning signs that Phoenix activity may be taking place.