Phoenixing is a pervasive, unlawful activity that is significantly harming businesses and workers, and a collaborative community response is required to address the issue. This is made clear by the new research report, Phoenix activity: Sizing the Problem and Matching Solutions, prepared by PricewaterhouseCoopers.
Phoenixing has been used to describe companies that collapse with a range of debts and liabilities and, like the bird in Greek mythology, rise from the ashes a short time later.
The report formally defines the 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.”
Cost of phoenixing
The Fair Work Ombudsman commissioned the research report after identifying an increasing trend in companies engaging in phoenix-like behaviours to avoid paying employee entitlements and court-issued penalties.
The report estimates the annual cost of phoenixing on the Australian economy at between $1.78 billion and $3.19 billion. Disturbingly for business-operators, the report estimates that the total cost to businesses is between $992 million and $1.93 billion, as a result of phoenix companies not paying debts, and goods and services paid for but not provided.
It is estimated that the cost to employees is between $191 million and $655 million in the form of unpaid wages and other entitlements, and that the cost to government revenue is between $601 million and $610 million, mainly as a result of unpaid tax — but also due to payments made to employees under the General Employee Entitlements and Redundancy Scheme.
The report also acknowledges that 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 phoenixing companies, which gain an unfair competitive advantage by avoiding payment of debts. It identifies a number of high-risk industries, including private security, cleaning and elements of the building and construction industry. Medium-risk industries identified include building and construction, road transport, and textile, clothing and footwear.
The importance of the community being aware of phoenixing and contributing towards tackling it is made clear in the report. Practitioners should consider lead indicators that can identify that phoenix activity may be likely to occur, including a company failing to lodge a tax return or Business Activity Statement, business records overstating or understating the operations of the business (including financial status or debts), workers being pressured to take leave, and withholding of employee entitlements such as wages and superannuation.
What are the challenges?
One of the challenges in tackling phoenixing is that it involves a number of unlawful elements, including tax avoidance, fraud and underpayment of employees’ lawful entitlements.
Professionals centrally involved in the operational headquarters of businesses need to be alert to the threat posed by phoenix operators and ready to report them to the relevant authority, such as the Fair Work Ombudsman, Australian Tax Office (ATO) and Australian Securities and Investments Commission (ASIC).
The research report makes a series of recommendations about measures for addressing phoenixing, including cross-agency approaches to targeting phoenix behaviour and educating the community about indicators of phoenix activity.
The Fair Work Ombudsman — a member of an Inter-Agency Phoenix Forum that also includes ASIC, the ATO, Fair Work Building and Construction, the Australian Competition & Consumer Commission and the Department of Sustainability Environment, Water, Population and Communities — has already made significant progress in establishing relationships with other bodies to work collaboratively in this area.
The purpose of the forum is to work collaboratively to identify, design and implement cross-agency strategies to reduce and deter phoenix activities and the Fair Work Ombudsman intends to discuss the report’s recommendations at the forum in the near future. The research report will also help inform the Fair Work Ombudsman’s internal education and compliance processes in relation to tackling phoenixing activity.