ATO target: How to avoid being burnt by a ‘phoenix operator’

The ATO is reviewing contractors working on 2018 Commonwealth Games construction projects

So-called phoenix operators, involving the deliberate liquidation of companies to avoid paying creditors, taxes and employee entitlements and then setting up new entities to carry on the same business with the same owners, have been in the Australian Tax Office’s sights for a number of years. The building and construction industry has been a particular area of concern. 

The practice can cost the economy big sums, as well as meaning that people such as contractors could miss out on their wages and superannuation payments.  

Lately, with large construction projects under way at the Commonwealth Games sites on the Gold Coast, the ATO has taken a close interest. 

The ATO has worked with the Office of Commonwealth Games Coordination to ensure Gold Coast Commonwealth Games sites are protected from phoenix operators. 

Contractors working on the Commonwealth Games sites should expect the ATO will be looking more closely into their tax affairs and will have a more visible presence on sites.  

Deputy Commissioner Michael Cranston said that the ATO was reviewing all contractors working on 2018 Commonwealth Games construction projects and had already reviewed 55 contractors involved in building the Southport Aquatic Centre. As construction on further venues gets underway, the ATO will be monitoring closely, he said. 

“Whilst most businesses do the right thing, the ATO has found that building and construction is one industry where we see too many phoenix businesses. Given the large number of contractors working on Commonwealth Games construction sites, it’s a good opportunity for us to identify those who might be trying to rort the system,” Cranston says. 

Contractors can confirm an entity they are dealing with is registered and that its ABN is valid by checking the Australian Business register. They could also do a credit check on the entity or even ask for references. Taking this sort of action can help guard against phoenix activity. 

Recent figures show that phoenix activity costs the Australian economy $3.2 billion each year. Honest businesses suffer the most, losing almost $2 billion in unpaid debts and the non-supply of purchased goods and services, the ATO said. 

The ATO is concerned that phoenix operators create an unfair market advantage for themselves by deliberately liquidating companies to avoid paying creditors and then setting up new entities to carry on the same business. This means they can undercut their competitors. 

The ATO says there are signals or indicators to look out for that may indicate a company is participating in, or about to participate in, fraudulent phoenix activity, such as: 

1. the company is able to seriously undercut other contractors 
2. workers are pressured to take leave 
3. workers have their employment status changed from permanent to casual 
4. workers are underpaid or paid irregularly 
5. superannuation payments are not made 
6. equipment, machinery and uniforms are not replaced as needed 
7. company owners or directors enjoy an extravagant lifestyle that doesn’t appear to match their income 

The ATO said it is involved in a number of cross agency taskforces that are focussing on tackling phoenix operators. In the more serious matters, criminal investigations and prosecutions can result. For example, an inter-agency Phoenix Taskforce uses sophisticated data-matching tools to identify, manage and monitor suspected fraudulent phoenix operators.  

This taskforce will also work with the new Serious Financial Crime Taskforce to share intelligence and information between partner agencies and facilitate identification, management and monitoring of suspected criminal behaviour. 

Phoenix activity is set to remain on the ATO’s radar for some time to come. It is an issue that SMEs should pay particular attention to as it could adversely affect them.

Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.