Wednesday, 27 November 2019
Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019; Second Reading
The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 concerns the practice of illegal phoenixing. It aims to combat this practice: the unscrupulous art of stripping assets from one company to another to avoid paying debts. It attempts to combat phoenixing by creating a range of new powers for regulators. Unfortunately, if left unamended, it will fall well short of its lofty objective.
The bill includes a new phoenixing offence that will catch directors who make creditor-defeating dispositions, enabling ASIC to make orders to recover company property in phoenixing cases. This includes new measures preventing directors from improperly backdating their resignations—a classic trick of the trade in phoenixing. The bill also provides new powers for the ATO in relation to GST liabilities and tax refunds. These new powers will improve their ability to chase down the tax cheats who seek to defeat the ATO through the use of illegal phoenixing.
Illegal phoenixing is a serious issue in this country, costing Australian workers and small businesses billions of dollars every year. We're talking about dodgy directors who make a habit of stripping businesses of their assets, skipping out on their debts to their workers and their creditors, and starting a new business out of the ashes of the old, only to run the whole game all over again the next time the going gets tough. We're talking about developers who build apartment buildings with glaring defects, only to vanish in a puff of paperwork and smoke, leaving the owners holding the repair bill.
In 2018, PricewaterhouseCoopers estimated that the annual direct cost of phoenixing activity to the Australian economy could be between $2.9 billion and $5.1 billion per annum. This includes up to $3.2 billion worth of unpaid invoices for services provided, and up to $300 million of unpaid entitlements for Australian workers. And that only includes the direct costs; we are not counting the stress imposed on small-business owners who hold unpaid invoices from companies that no longer exist, or the heartache on employees who go unpaid at the end of a hard day's work.
This issue has hit home in just about every electorate in this parliament, I dare say. Earlier this year, I watched A Current Affair with horror as they showed the story of Tara Teo, a local woman from my electorate who was caught up in the collapse of JUMP! Swim Schools franchises. I have spoken to Tara and learned more about her story. Tara entered into an agreement with JUMP! Swim School two years ago to purchase a swim school franchise in Albion Park. Her initial investment was $150,000 to build the facility and get started with the business.
Tara wasn't a fool: she did her research and she looked into the company. At the time, JUMP! Swim Schools had 66 trading sites across Australia. But, a year later, nothing had been built. When Tara chased things up, she was shocked to discover that the company had been trading insolvently since March 2016. The company went into liquidation and Tara lost everything. Meanwhile, the CEO of the company, Ian Campbell, was able to go to the United States and open up 11 new franchises—and not just in America; his company has operated franchises in New Zealand, Brazil and Singapore. The court cases are still going on, but the damage to Tara and her family has already been done. I know the ACCC is already on the case, but I urge overseas regulators to look carefully into the activities of Mr Campbell and his dubious dealings as well. If PricewaterhouseCoopers are correct, then she is sadly far from alone out there. It is time that we did something about the laws that let people like Mr Campbell get away with these disasters.
Labor has long urged the government to act on illegal phoenixing, and we congratulate them for finally getting some work done on this bill. We support the bill in its objectives. However, it doesn't go far enough. The fact is that it will do relatively little to combat illegal phoenixing. More needs to be done. The Australian expert on this is Professor Helen Anderson. She says that these laws won't solve the phoenixing problem. What we need is a system to identify the dodgy directors. Right now it's easier to start a company than it is to open a bank account. You don't need 100 points of identification. You can even register a directorship in someone else's name or, astoundingly, in your dog's name. I look back to the case of Philip Whiteman, the pre-insolvency adviser who reportedly used the names of vulnerable people without their consent to create dummy directors of companies and to help the real owners escape prosecution. It was reported widely. A banker from Geelong was installed by Mr Whiteman as a director of three different companies that he'd never heard of. Another man, suffering from homelessness at the time, was installed as the director of multiple businesses and hit with more than $6 million in director penalty notices and other fines. His Centrelink payments were cut off because of the mistaken belief that he was the genuine director of these companies that he had never heard of. This is utter madness. It is well past time that this sort of legislation was passed, legislation which would implement an identification check for company directors so that we can properly enforce existing antiphoenixing laws.
In February of this year we had some hope. In February, the moribund Morrison government finally introduced legislation to introduce a system of director identification numbers, a policy that Labor had backed for years, alongside a huge range of other stakeholders. I list them: the Australian Institute of Company Directors, the Australian Small Business and Family Enterprise Ombudsman, the Productivity Commission, the Tax Justice Network, the Australian Chamber of Commerce and Industry, Master Builders Australia, the Australian Council of Trade Unions, and the Australian Restructuring Insolvency and Turnaround Association. But this legislation has been nowhere to be seen since the election. Instead, the government has decided to introduce this bill, with the grandiose claim that it will combat illegal phoenixing, when stakeholders agree that it will barely shift the needle.
This is why Labor will be introducing a significant amendment to this bill, a bill that will implement director identification numbers and modernise the ancient legislation surrounding Australian business registers. This is a commitment that was laid out in the 2018-19 budget, some 17 months ago, by the then Treasurer and current accident-prone Prime Minister. Australians should be asking themselves whether they can trust any commitment that the Prime Minister makes if the members of the government fail to vote in favour of the Labor amendments.
We will be introducing the complete text of the Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2019. It was a bill introduced in February this year by the then Assistant Treasurer, the member for Fadden, as a series of schedules to this bill. These amendments would implement the government's stated objective of dealing with phoenixing. These amendments will implement the government's own longstanding but sadly until now entirely theoretical commitment to modernise business registers and set up director identification numbers. It's not very often in this place that I quote favourably the honourable member for Fadden. When he introduced the bill earlier this year he said: 'The Morrison government's legislation will modernise the administration of business registers. Currently, the data is hosted in different systems across various departments and agencies, imposing inefficient cost burdens on registrants in meeting their registration obligations and making it difficult and time consuming to find information. The legislation also introduces a legal framework for director identification numbers. This will provide greater insights to regulators, businesses and individuals on the identity and affiliation of directors.' They are laudable words—I agree with every single one of them. I expect the member for Fadden will be joining with Labor members when these amendments are introduced. I expect that he'll be voting in favour of his own words and his own bill.
These are all worthy goals—worthy goals that this government has seemingly abandoned sometime between February this year and today. It seems that not only do the government not have a plan to govern and support the economy, but they've given up on the few actual plans they had before the election. It thus falls to Labor to introduce the government's own legislation. We'll be doing the government's work for them once again. The member for Forde is about to speak on this bill. I expect that he'll be speaking in favour of the amendments that I have foreshadowed and that, when it comes to voting on those amendments, he'll be joining with Labor—the only sensible thing to do. He supported them once; he voted for them once when they went through their party room. I expect that he and all other members will vote for them when they have the opportunity to vote for them in this House today. We're also introducing a separate amendment to this bill that will require a review to be completed in five years time. This will let Australians get a better understanding of how effective these laws have been in combatting the terrible cancer of illegal phoenixing.
I appreciate the advice from the member for Whitlam but he'll be disappointed to know that, on this occasion, I support the bill in its original form. The reason is I and many others on this side of the chamber have been strong and consistent advocates and supporters of small and family business. In my nine years in this place, when you look at what those opposite say and what they actually do, that hasn't always been the case.
In my electorate, with over 15,000 small businesses, this is a very important piece of legislation. It is another part of what this Morrison government is doing to deliver for and support our small businesses. Whether it's lowering taxes or reducing red tape or now, as this bill does, combatting illegal phoenixing, we are seeking to support and encourage small and family businesses to grow, prosper and develop. If they can do that and they can employ more Australians, it will create opportunity for all and make our communities stronger. Over my time, I have had many discussions with small and family business owners at regular business networking events across my community, whether it's the Beenleigh Yatala Chamber of Commerce, Park Ridge Chamber of Commerce, Ormeau Business Connect or the Logan Country Chamber of Commerce and their various breakfasts and events. It's through these discussions, and having had my own business prior to coming into this place and family members who still have their own small businesses, we see the hurdles and the risks that face small business every day.
That is why this piece of legislation is so important. (Quorum formed) It's good to see that the business of the House continues apace. This package of reforms is, as I was saying, dealing with the issue of illegal phoenixing which, as the PwC report has shown, costs our economy somewhere between nearly $3 billion and $5 billion annually. More often than not, it's small to medium family businesses around the country that pay the price. It hurts those businesses, it hurts individual contractors and suppliers who are left unpaid and out of pocket and, importantly, it impacts employees who haven't been paid their entitlements and all Australian taxpayers who ultimately bear the burden of those unrecovered tax debts left behind by phoenixing activity.
This bill introduces a range of offences and seeks to prevent these illegal phoenix operators from gaining an unfair advantage over honest and competitive businesses, which has much broader economic impact and, as we've seen in Queensland over the last six or 12 months with the number of bankruptcies and companies going into administration, undermines business and public confidence in the business sector. It's toxic and it's damaging, and the objective of this bill is to get rid of this activity to ensure that the confidence that is necessary for our small- to medium-business sector and the trust, importantly, in that sector of dealing with other businesses is removed from the system. I think this bill, with the measures in it, goes a long way towards achieving these reforms.
As I said in my opening remarks, it is this government, through this piece of legislation and many others, that continues to work towards supporting our small- and medium-business sector right across the country. Those opposite, once again, want to get in the way of this legislative process. We need to give our regulators the power, the tools and the instruments to combat this illegal activity so that the businesses in our community that want to do the right thing can get on, build and grow their businesses and employ Australians. I commend this bill in its original form to the House.
I thank the member for Ford for his contribution to the debate. In summing up, I remind the House that this bill amends the Corporations Act, A New Tax System Act and the Tax Administration Act to address a range of activities that support illegal phoenixing.
Illegal phoenixing has been a problem for successive governments over many decades. Sadly, this is not a new problem. Our current laws have not been successful in deterring that illegal activity. This bill will give our regulators additional enforcement and regulatory tools to better detect and disrupt illegal phoenix activity, and to prosecute and penalise directors and others who engage or otherwise facilitate this illegal activity.
The amendments in schedule 1 to the bill include new offences and civil penalty provisions to target those who engage in and facilitate the stripping and transfer of a company's assets below market value with the effect of preventing, hindering or significantly delaying creditors' access to those assets. Asset stripping is a key strategy used by phoenix operators to avoid repaying debts. These offences attract strong penalties and will deter the core behaviours of phoenix operators as well as the facilitators of this illegal activity, such as pre-insolvency advisers. Schedule 1 also introduces a new recovery power for ASIC and extends the recovery avenues available to liquidators to enhance the recovery of assets lost through illegal asset-stripping activity. The new offences and asset recovery provisions will be subject to a number of important safeguards to ensure they don't impact legitimate businesses and genuine efforts to rescue a business that's in financial distress.
The amendments in schedule 2 improve the accountability of resigning directors and prevent directors from improperly backdating their resignation to avoid liability or prosecution for previous misconduct. In addition, the legislation prevents sole directors from resigning and leaving a company as an empty corporate shell with no directors. Together, these amendments combat strategies used by phoenix operators to avoid being prosecuted by regulators.
The amendments in schedule 3 to the bill give the ATO the necessary tools to more effectively collect and enforce tax debts to address the illegal phoenix behaviour. The amendments make directors personally liable for their company's outstanding goods and services tax, luxury tax and wine equalisation tax liabilities under extended estimates and director penalty regimes.
Meanwhile, in schedule 4 to the bill, the ATO's powers are extended to retain tax refunds to cover all tax types, where the taxpayer has an outstanding tax lodgement that would affect the amount that would otherwise be refundable. This amendment assists the ATO in deterring and disrupting the core behaviours of phoenix operators by removing the loophole in the existing legislation.
There has been broad consultation with stakeholders on the policy and this legislation. Consultation on a discussion paper was conducted in 2017 and the consultation on the exposure draft was conducted in 2018.
It's clear these reforms build on a range of other actions the government has taken to combat illegal phoenixing and, more broadly, crime and fraud in the economy, including amending the insolvency practice rules to restrict the voting rights of certain creditors related to the phoenix company; increasing funding for the Assetless Administration Fund by $8.7 million over four years; increasing ASIC's ability to fund liquidators, who play a vital role in investigating and reporting illegal phoenixing activity; establishing a phoenix hotline to make it easy to report suspected phoenix behaviour to the ATO; establishing various task forces to tackle illegal phoenixing activities—the Black Economy Taskforce and the Serious Financial Crimes Taskforce being those bodies; introducing legislation to address the corporate misuse of the Fair Entitlements Guarantee scheme to protect Australian workers and limit the successive drain on the taxpayer funded scheme as a result of sharp corporate practices, including illegal phoenixing.
The bill also makes minor amendments to the government's already legislated insolvency reforms which form part of the National Innovation and Science Agenda and were aimed at encouraging a culture of business rescue for companies in financial distress. These amendments will ensure that these important reforms continue to operate as intended.
The bill was considered by the Senate Economics Legislation Committee, which recommended that the bill be passed. We will not be supporting those amendments that have been moved by the opposition or foreshadowed by the shadow minister. We don't think these 'worthy' changes—in the words of the shadow minister—should be held up for a much broader piece of important work led by this government with director identification numbers. The government is progressing a very ambitious agenda to ensure, through the Modernising Business Registers program, director identification numbers are put in place. This is explicit government policy. We welcome the shadow minister essentially foreshadowing bipartisan support of the Morrison government's policy with respect to director identification numbers but we certainly don't believe that these extraordinarily important amendments to tackle aspects of illegal phoenixing should be held up due to the more ambitious and larger work that will be done through the modernising business registers. I therefore commend the bill to the House.
Question agreed to.
Bill read a second time.