Compliance
Phoenixing
Phoenixing is when a company is deliberately wound up to avoid paying debts, such as tax, and its business continues through a new company. Illegal phoenix activity is targeted by regulators.
The term phoenixing comes from the idea of a business rising from the ashes. In an illegal phoenix arrangement, a company runs up debts, often including unpaid tax, employee entitlements and creditors, and is then deliberately liquidated or abandoned. The same business is continued by a new company, often with the same owners and assets, leaving the debts behind. The activity is harmful to creditors, employees and honest competitors.
Not all business failures are phoenix activity. Companies fail for many legitimate reasons, and directors may start new businesses after a genuine failure. What makes it illegal is the intent to avoid debts, and usually the transfer of assets from the old company to the new one at less than their real value, so that creditors cannot recover. The ATO and the corporate regulator both look at the pattern of conduct, not just one step.
GST and other tax debts are often central. A business that collects GST from customers but does not pay it to the ATO, or that does not lodge BAS, may build up large debts. The ATO responds with tools such as director penalty notices, which make directors personally liable for certain debts, and the ability to hold directors liable for transfers of assets designed to avoid creditors. Other measures include increased information-sharing and data analysis.
Penalties for illegal phoenix activity can be significant. They can include civil penalties, disqualification of directors, claw-back of assets and, in serious cases, criminal charges. Advisers or promoters who assist can also face action. Taxpayers need to be careful with arrangements that involve moving a business to a related new entity while leaving debts behind, especially near the point of insolvency.
For genuine businesses in difficulty, there are lawful options. These include negotiating a payment plan with the ATO, using formal insolvency processes such as voluntary administration or restructuring under proper supervision, and selling assets at fair value to an independent party. Seeking early advice from a registered tax professional or insolvency practitioner can help a director find a lawful path.
Customers and suppliers also face risks from phoenix activity. A supplier who is not paid by one company may find the director has moved on to a new one. Businesses can reduce risk by checking the details of the companies they deal with, using credit checks and being careful with large unpaid accounts. They may also report suspicious conduct to the relevant regulators.
This page is general information only. Confirm your situation with the ATO or a registered tax professional.
Worked example
A building company owes the ATO $66,000 in unpaid GST and PAYG withholding. The director liquidates it, then starts a new company with a similar name that takes over the same equipment and contracts for a nominal sum. The ATO treats the transfer as a likely phoenix arrangement, issues director penalty notices and may pursue the director personally for the $66,000.
Practical tips
- Do not transfer assets to a new entity at less than fair value to avoid creditors.
- Seek advice early from a tax professional or insolvency practitioner if the business is in trouble.
- Do checks on companies you trade with, especially if they ask for large credit.