A new law to stop companies transferring assets to avoid their liabilities could also have serious impacts for their advisers, with new civil penalties set to be imposed.
“Measures in the new legislation can capture advisers, accountants and lawyers, who may be seen as giving general advice that may be seen as encouraging phoenixing activity,” explains Ian Murray-Jones, Senior Tax Writer at Thomson Reuters.
It’s all history now
The law is part of a series of federal government measures that sprang from the Senate inquiry in 2015 into the Black Economy, the dark side of the economy that trades in cash that doesn’t get declared.
“There was a huge amount of revenue leakage,” explains Murray-Jones. “And that’s what these measures were put in place to address.
“Ironically GST in fact was meant to fix the Black Economy by creating a paper trail that could be audited. But that hasn’t happened.”
A new Act hopes to change all that. The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020, that received assent on 17 February 2020, targets any company and their advisers who facilitate illegal phoenix activity, specifically the making of “creditor-defeating dispositions”. For company owners and directors engaging in this activity there will be criminal penalties, and those advising them will attract civil penalties.
In effect, creditor-defeating dispositions refer to the transfer of an asset from one entity to another so that the creditors of the entity disposing of the property cannot access assets to recover their debts.
“But some accountants advise on that,” says Murray-Jones. “The idea was that if your client had some cashflow problems, you’d suggest to transfer assets to avoid liability, start a new entity and trade from that – to buy time and give them some short-term relief. But’s that in breach now.”
The critical phoenixing moment is when the first entity is wound up.
“If you advise on the transfer of assets from company A to company B, and if company A is wound up within 12 months after you dispose of the assets – you are well within the scope of this legislation.”
Grey, blurred lines
The concern for Murray Jones is that this new law may catch those advisers on the periphery, the grey lines, who didn’t intend to engage in phoenixing activity.
“There are some advisers who somewhat naively set up arrangements to facilitate a short-term opportunity to continue trading and, in doing so, fall foul of these provisions.
“Many of these are trying to assist their client and act in their best interests. But sometimes the edges can get a bit blurred.”
The simple message? “If your client is having any problem with their cashflow, if they’re struggling to pay their tax bill, and they come to you for advice, just be very careful what you record in writing and emails, as the ATO can access all of that.”
Don’t get caught
Along with drawing on data from real-time reporting in single touch payroll, the ATO is sharing data across other government agencies, using analytics to profile taxpayers and catch high-risk behaviour. So, they will catch you!
Murray-Jones is concerned that this blurred area will have to be defined. “It will only be defined by prosecutions by ASIC, the ATO and the TPB. These will be reported in Thomson News Services such as the Weekly Tax Bulletin and advisers will need to be on top of the news and follow these cases closely.”
“This legislation, with its scope and its grey lines, could have a lot more impact than people anticipate. Keep an eye out for the prosecutions to come!”