Phoenix activity costs Australia between $1.78 billion and $3.19 billion a year, according to a report into phoenix companies in Australia released today by the Fair Work Ombudsman.
The report, prepared by PricewaterhouseCoopers (PwC), estimates that the annual cost of phoenixing in Australia is between $191 million and $655 million for employees, in the form of unpaid wages and other entitlements.
The cost is between $992 million and $1.93 billion for businesses as a result of phoenix companies not paying debts, and goods and services paid for but not provided and between $601 million and $610 million for government revenue, mainly as a result of unpaid tax.
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The report warns there are a range of further impacts of phoenixing that were not able to be quantified, such as the impact on businesses’ revenue of being undercut by phoenix companies, which gain an unfair competitive advantage by avoiding payment of debts.
It identifies a number of high-risk industries, including private security and cleaning.
Fair Work Ombudsman Nicholas Wilson said the research was commissioned because the FWO had noticed an increasing trend in companies engaging in phoenix-like behaviours to avoid paying employee entitlements and court-issued penalties.
The lack of an agreed definition of phoenix activity is a significant problem in countering this activity, according to the report.
It proposes a definition of phoenix activity as: “The deliberate and systematic liquidation of a corporate trading entity which occurs with the fraudulent or illegal intention to avoid tax and other liabilities, such as employee entitlements; and continue the operation and profit taking of the business through another trading entity.”
The report also makes a series of recommendations about measures for combating phoenix companies, including a cross-agency approach to targeting phoenix behaviour; a “name and shame” register of people involved in phoenix companies; and a civil remedy including a penalty of up to $33,000 alongside a potential order for compensation for loss suffered by people such as employees.
Wilson said the research report will help inform the FWO’s education and compliance processes in relation to phoenixing.
“We are presently giving serious consideration to many of the report’s recommendations,” he said.
“The Fair Work Ombudsman has jurisdiction in relation to some consequences of phoenix activities, such as underpayment of employee entitlements, while agencies such as the Australian Tax Office and the Australian Securities and Investment Commission have jurisdiction for other aspects, such as tax avoidance and fraudulent behaviour, so it is important we work closely with these agencies.”
Pitcher Partners director Anthony Elkerton told SmartCompany that while it would be good to have one definition of phoenix activity, there are problems with the FWO’s definition.
“Their definition that any transfer of a corporate entity to a new entity is a phoenix activity and almost should be frowned upon, doesn’t take into account that at times it is in the interest of the creditors at liquidation or whether a fair value was paid,” he says.
“My view is that if fair value is paid it is not detrimental.”
Elkerton says he is not surprised by the FWO’s estimates of the cost of phoenix activity to both the government and business.
“I’m not surprised, I think it would actually be closer to the upper end of the estimates,” he says.
“The FWO doesn’t go into the very important area which is the unfair advantage that phoenix operators get against businesses which are complying with the law and have a higher cost base and are paying their taxes.”
Elkerton called for legislative change to penalise phoenix companies and directors.
“There should be legislative change and a greater ability for a liquidator to claw back the assets when they have been phoenixed because at the moment the cost of doing so is prohibitive,” he says.
“A register of phoenix operators is a very good suggestion and could be put in place very quickly. The only problem is that in the sophisticated phoenix operations they use a number of different family members as directors.”
How to spot a phoenix company
The FWO’s report sets out a range of “signals” or “indicators” that phoenix activity may be about to occur.
The FWO said these generally occur before the company has been liquidated and so can be considered leading indicators of phoenix activity:
- The company fails to lodge tax returns or Business Activity Statements;
- The business records or taxation records significantly understate or overstate the operations of the business, including debts owed;
- There are withheld payments such as PAYG, superannuation and child support;
- Payments are kept by the business;
- Workers are pressured to take leave;
- Workers have their employment status changed from permanent to casual;
- Workers are underpaid; and
- Equipment, machinery and uniforms are not replaced as needed.