The deliberate use of trading entities, or phoenix arrangements, that seek to evade tax are in the taxman’s sights. By TERRY HAYES of Thomson Legal & Regulatory. By Terry Hayes
The tax office has announced a new focus on the use of phoenix entities by SMEs. In general terms, phoenix arrangements involve attempts to evade tax through the deliberate, systematic and sometimes cyclical liquidation of related corporate trading entities.
In 2007-08, the tax office says it will increase its emphasis on early intervention concerning such arrangements by:
- More effectively identifying and tracking phoenix operators – there are operators in the market that actively conduct such operations.
Discouraging new or emerging phoenix operators from becoming serial recidivists, by identifying and contacting them earlier about their behaviour.
Examining tax agents to identify links to such behaviour.
The tax office considers that characteristics associated with the use of such entities that produce a risk to the revenue include:
- Entities that consciously seek to liquidate themselves in order to escape paying tax obligations.
All obligations are usually affected — PAYG withholding, superannuation, GST, income tax.
A high prevalence in the labour-intensive industries.
A high prevalence within the $2 million to $15 million turnover range.
As phoenix arrangements sometimes involve non-compliance outside the tax jurisdiction, the tax office also works and exchanges intelligence with other government agencies, especially ASIC.
The tax office says its compliance strategy will seek to:
- Explore the possibility of new legislative measures as a deterrent by making directors of phoenix entities legally responsible for tax debts incurred by companies. This includes a tightening of the director penalty provisions and reducing the extent to which closely held grouped entities are utilised for the purposes of avoiding tax obligations.
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Introduce improved data-matching techniques to identify recidivist phoenix offenders.
Embark on early active compliance intervention to contact taxpayers who are identified as engaging in phoenix behaviour in the early stages of the entity business cycle.
Of course, legislative reforms to perceived problems can sometimes have unintended consequences. Any legislative reforms would need to be approached with caution to ensure that potential innocent businesses are not harmed or damaged.
For instance, there could be ramifications for a private group that is fulfilling its tax obligations where only a part of its business goes bankrupt. The impact of any legislative changes would need to consider this.
Also, if specific legislation were enacted, the tax office would need to distinguish between a phoenix operator and a genuine business operator. Calling in administrators and liquidators can be legitimate and prudent business planning, as genuine business operators who face financial difficulties are most often interested in trading out of their business difficulties and are therefore keen to seek expert advice.
Liquidation and bankruptcy are legal options open to taxpayers. If taxpayers choose either of these courses of action, this does not imply they have broken the law or that their intention is to become a phoenix operator. Any legislation against phoenix arrangements would need to recognise this.
Where action against a group entity is considered, tax practitioners have suggested that the tax office should concentrate its efforts on the directors of the subsidiary entity that has defaulted on its tax liabilities. That is, not target the whole group.
Phoenix arrangements that seek to evade tax are a blight on the community. The tax office is clearly right to target them but, as always, any legislative response needs careful thought and should not affect genuine business operators.
Terry Hayes is the senior tax writer at Thomson Legal & Regulatory , a leading Australian provider of tax, accounting and legal information solutions.
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