Wednesday, 5 February 2020
Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019; Second Reading
Labor has long urged the government to act on illegal phoenixing, and we congratulate them for finally getting to work, through this bill. We support the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 and we support its objectives. However, we acknowledge some of the concerns raised by stakeholders in relation to this bill , and I will go to that later in my remarks. We also acknowledge that the public is very interested in knowing—has a right to know—whether the provisions in this bill will have their intended effect, because phoenixing hurts people. Illegal phoenixing hurts people, and it is critical that government finally put their shoulder to the wheel and apply just a little bit of effort to dealing with this very serious problem. It's important that this legislation works, and we will therefore be proposing amendments to the bill that will require a statutory review to be conducted in five years time. The review will provide better evidence that any future reforms to phoenixing law work and will ensure that the bill is working as intended.
Before moving onto the substance of the bill, it's worth touching on a related matter. Late last year the government, after months of pressure from Labor, introduced legislation into the House of Representatives to finally implement the director identification number and modernise the business registers. Ironically, this recent legislation, yet to be passed, merely introduced into the other place, mimics the amendments to the legislation introduced by Labor that we will be debating today. We introduced amendments in the other place. Those amendments were voted down by the government. They have dragged their heels at every point, always a step behind us, never confronting this issue and the seriousness of it. Our fight to introduce director identification numbers has had widespread support from the AICD, the ACTU, the ACCI, the small business ombudsman, master builders, and stakeholders across the building and small business sector. Like the government, Labor committed to implementing director identification numbers, back in 2017, but it is only recently that government have gotten around to putting legislation for this critical piece of the puzzle into the parliament. Indeed, as I noted, they've previously refused to vote for these measures. Without Labor's work on this issue, the Liberals, in order to prioritise a partisan political agenda attacking unions, would continue to allow fraudsters to rip off small businesses and their employees.
Every year, illegal phoenixing costs Australian workers and businesses billions of dollars. Illegal phoenixing sees company directors strip businesses of their assets when times get tough, not pay their debts to workers, and then vanish completely, only to start a new business later on. In many cases directors do this numerous times. It affects workers and businesses in many ways. Some developers have built apartments blocks with defects and then disappeared. Owners are left holding the repair bill. Companies that no longer exist leave small businesses with unpaid invoices and workers without wages. A 2018 report by PricewaterhouseCoopers estimated that the annual direct cost of phoenixing to the Australian economy could be between $2.9 billion and $5.1 billion. This includes up to $3.2 billion in unpaid invoices for services provided and up to $300 million in unpaid entitlements for Australian workers. This is not fair. It is not right. It is deeply immoral.
Labor has heard disturbing stories from people like Benjamin, previously employed by M2M Global Technologies. Following the liquidation of that company, in May 2018, Benjamin has been unable to reclaim unpaid superannuation and employee entitlements, including unpaid leave and commissions of approximately $12,000—$12,000 in an ordinary household, unpaid because a company is liquidated. M2M is now a deregistered company with ASIC. However, Benjamin is of the view that a new company, ATGA, has been formed, with the same owners, to avoid the payment of any obligations to employees. He contacted the Fair Work Ombudsman and was advised this matter didn't fall within their scope. He also contacted the ATO regarding unpaid superannuation but was told the matter could not be pursued. He is aware that he's basically exhausted the current options available to him, other than mediation. Without policy and legislative change, there is little further that can be done to assist him.
Another example came from Gareth and Debbie, who previously hired a company, Joyce Kitchens, to refurbish their kitchen. The resultant product was not as agreed, but that company had completed the work, was liquidated, and then restarted a week later—one week later!—under a different name. As a result, this couple have been unable to receive compensation and have been told they must pay, out of their own pocket, for another refurbishment. In the meantime they have a non-functioning kitchen.
These actions, these immoral actions, have real human costs, and this was reflected in the evidence that came before the Senate Economics Committee. The stakeholders for the most part supported the bill. However, many noted that the government's primary focus should be on amending and enforcing existing legislation, not on developing new complex legislative amendments and offences. There was some concern that the proposed measures within the bill are likely to have limited impact as they're highly technical. There was concern that they do not substantially expand ASIC's power to combat phoenixing. It's on this basis that Labor recommends a statutory review be provided for in the legislation because of this uncertainty about whether the provisions will work in the way that the government says that they will work.
Professor Helen Anderson in her submission put forward a view that ASIC already has powers to prosecute illegal phoenix activity. She questioned the need for further legislative amendments. Similarly, the Australian Restructuring Insolvency and Turnaround Association stated that existing legislation contains a number of tools which already address illegal activity; however, the problem is that there is insufficient focus on enforcement actions and, as a consequence, there is no meaningful deterrent for those who engage in this activity. Similarly, the Australian Institute of Company Directors supported the legislation but argued for more proactive policing of legislation.
The Australian Council of Trade Unions expressed concern that this legislation may be a mask for failure to take substantive enforcement action. They noted that:
Whilst the proposed amendments may make ASIC’s task in prosecuting illegal phoenixing behaviour easier, they will be of little value without a significant increase in ASIC’s resources and willingness to deploy them forcefully.
Witness after witness argued that without resources and determination on the part of the regulator to utilise existing laws, additional laws will have little impact.
This bill is ambitiously titled 'combatting illegal phoenixing'. As the committee process made clear, the real task to combat illegal phoenixing may well lie in the implementation. We know that ASIC has limited resources and is unable to pursue all of the reports of corporate misconduct that it presently receives from administrators and liquidators. Without additional funding and staffing, it's difficult to see how ASIC will be able to use these new powers to their full potential.
The government needs to act to ensure ASIC has the ability to support more difficult court cases without draining their resources and they should understand that they have government support, that government really is behind the pursuit of these immoral actors in the economic system. These reforms to combat illegal phoenixing must be adequately resourced, appropriately funded and genuinely politically supported.
In contrast to the government's lacklustre approach, we have always had a strong commitment to antiphoenixing, especially in relation to its impact on the construction industry and its workers. The government has shown little interest in prosecuting corporate misconduct. Here and in other domains, witness them dragging their heels on implementing the findings of the royal commission into banking. Labor will be watching closely to ensure that this bill and other measures to improve corporate integrity are implemented and enforced by the government.
The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 is a positive step towards tackling the immoral practice of phoenixing which, by design, is all about swindling innocent people. We've all heard the stories. We know the characters. We know the damage they do, and all too often they get away with it. For the few who are prosecuted, the penalties are often measly and not enough to deter wrongdoing. So I very much welcome the government's efforts to fight phoenixing and to stop the rorting which unfairly takes the money from the pockets of employees, subcontractors, suppliers and governments.
A recent example from South Australia bears this out. The Commonwealth public prosecutor recently secured the conviction of a company director who had engaged in illegal phoenix activity. This director operated two entities, Eastwood Insulation and Thermal Clad. Thermal Clad held the assets and Eastwood Insulation held the debts. When Eastwood was inevitably placed into administration, it owed more than $2 million, including $1.2 million to the tax office.
The damage from this kind of behaviour is widespread. Employees are suddenly unemployed, and then they find that they're owed wages, entitlements and superannuation. In construction, customers find that jobs are left unfinished and their deposits or progress payments have, incredibly, disappeared. Subcontractors and suppliers don't get paid, so cash flow problems ripple throughout the economy. And of course the broader community is affected when taxes aren't paid to state and Commonwealth governments. There is also flow-on reputational damage that affects others in the sector and casts suspicion on honest operators.
I don't believe that this bill will fully stamp out phoenixing, but I do believe that it will help. First, it will allow ASIC and the courts to unwind transactions, such as when dodgy directors strip out assets before a business goes bust. This will ensure that administrators can access a firm's assets and pay creditors. Second, the law will impose new rules on directors. It will prevent resignations in certain circumstances, prohibit backdated resignations and make directors personally responsible for GST and other liabilities to the Commonwealth. These measures will make directors think twice before they engage in unethical business practices.
Some have argued that this bill impinges on the workings of the free market, particularly an individual's right to have a business without facing any personal risks. Well, let me say that I disagree 100 per cent. I've run a number of businesses over the past 40 years and I can tell you that risk exists whether you want it or not. A prudent manager knows the state of their business and runs it accordingly. You know when trouble is coming and you can make choices. You can shut the business down. You can contribute additional capital. You can call in the administrators. What you can't do is take money that legally belongs to other people and use it to prop up your business. In my book, that's no different to stealing—stealing from your workers, your suppliers and taxpayers—and it deserves to be treated in the same way.
I am very pleased that the government has introduced these measures, and I agree with Labor: a little late, but it is good that it has been finally introduced. The bill is a good start to dealing with bad business behaviour and holding dodgy directors and business owners to account, and I very much look forward to its passage this morning.
I'm very pleased to rise to speak in favour of the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. Perhaps I could commence by referring to some remarks Senator Griff made. This is not about inhibiting the free market; this is about holding directors to account to both their legal and, dare I say, moral obligations with respect to the discharge of their duties.
I have been in situations, including the global financial crisis, where I've had to advise directors in difficult positions in relation to solvency—directors who were seeking to do the right thing by their creditors, to do the right thing by their employees and to do the right thing by the array of stakeholders impacted by their business decisions. Prior to the introduction of the safe-harbour rule, directors were quite often in extremely difficult positions. In many cases the easy thing for a director to do was to appoint administrators and walk away. The harder thing to do was to raise the capital, negotiate with creditors, adjust the business model and navigate through the difficulties associated with running a business in the context of events such as the global financial crisis.
I'm extremely pleased that in 2017 a safe-harbour rule was introduced for directors in terms of insolvent trading liability. And in starting this debate I think I'd like to refer to that first, as one end of the spectrum. The safe-harbour rule allows directors of a company that is in financial distress to continue to trade and to incur debts if that is in connection with the course of action that is reasonably likely to lead to a better outcome for the company, a better outcome for the creditors as a whole. That is directors performing their duties responsibly. At the other end of the spectrum is the phenomenon of illegal phoenixing. As Senator McAllister referred to in her remarks, illegal phoenixing has a devastating effect on a range of stakeholders.
The PwC report that Senator McAllister referred to estimated that the total direct costs for 2015-16 to be in the range of between $2.85 billion and $5.13 billion. Let's break down those costs. The first element is $1.162 billion to $3.171 billion for unpaid trade creditors, large and small. Those unpaid debts and the impact on cash flow can have a devastating impact on those trade creditors and can actually lead to them being placed in insolvency. The second element of that aggregate total is employees' unpaid entitlements of $31 million to $298 million. Senator McAllister gave an example of the personal impact that can have on employees. There is also the impact on government and the Australian people. PwC estimated that in 2015-16 the total cost to government was approximately $1.66 billion.
Then there are the indirect costs, and I want to say something about them as well. Firstly, there's the stress on employees. I've dealt with employees and trade creditors who are facing the prospect of a company they're engaged with becoming insolvent. It is extraordinarily stressful and it takes a huge mental and physical toll. So there's that indirect cost. Secondly, there's the discouragement effect, the demoralisation effect on those small trade creditors, many of whom make the decision that it's just too hard; they've worked too long and too hard to see their businesses jeopardised by illegal phoenixing activity. There is the social welfare burden of those employees who are in need that's transferred to the government. There's also the burden that's placed upon non-government organisations who help those people in those dire situations, as they should do. Then there's the competition effect. For every illegal phoenix company and every director engaging in illegal phoenix activity, there are many, many Australians who are doing the right thing, who are paying entitlements to their employees, who are paying their trade creditors, who are complying with their obligations, be it under the Corporations Act or otherwise, and they're being put at a competitive disadvantage by the illegal phoenix activity of some who avoid those costs and thereby obtain a competitive advantage. So there are both direct and indirect costs.
As to whether or not these amendments would work, I will make a few points. First, we should note that ASIC has been bringing prosecutions and disqualifying directors for illegal phoenix activity. This has been occurring. When I was looking at the literature in preparation for this speech, a number of directors were indeed disqualified from acting as directors in just the last three or four months. ASIC is taking action. They do need to be resourced to undertake this activity; there is absolutely no question about that. The second point I would make is that quite often in the context of Corporations Act issues coming before the courts it is necessary to get into the detail and to provide technical support through amendments such as those contained in this act that allow the regulator to discharge their evidentiary burden of proof. In my view, there are a number of very effective provisions in this legislation which will help in that regard. They include presumptions that are raised in the context of companies not maintaining correct corporate records. In many situations, when an administrator or a liquidator moves into a company that has entered into insolvency because of illegal phoenixing activity, there are simply no records. There's no way for the administrator or the liquidator to get their head around what has actually occurred. So there are a number of very important presumptions that are raised with respect to the calculation of the value of assets which have been transferred out of a company in the event that records have not been kept in accordance with the law, and I think those presumptions are extremely important.
The second technical amendment brought about by this legislation, which I believe is extremely important, prevents directors from improperly backdating resignations or from resigning from the board of a company when they're the last standing director.
I've given advice to directors in positions where they've been faced with extremely difficult trading conditions. They've been concerned about their own personal liability, and they've talked to me and sought my advice about what the right thing to do is—and they have done the right thing. They have done the right thing by the company, by creditors and by shareholders, and they've stayed the course. At the other end of the spectrum, you have illegal activity, in essence, where directors are simply seeking to structure their resignations, to abandon their duties and obligations as directors, to make it more difficult for the regulator to prosecute for illegal phoenix activity. This bill does address that situation.
The reforms in this bill build on other actions that the government has taken to combat illegal phoenixing and, more broadly, crime and fraud in the economy, and these should be noted. They include the amendment of the Insolvency Practice Rules to restrict the voting rights of certain creditors related to the phoenix company. Secondly, they increase funding for the Assetless Administration Fund by $8.7 million over four years. This will increase ASIC's ability to fund liquidators, who play a vital role in investigating and reporting illegal phoenix activity. We should note that most liquidators in our country do the right thing.
Thirdly, the reforms establish a phoenix hotline to make it easier to report suspected phoenix behaviour directly to the ATO. Fourthly, they establish various task forces to tackle illegal phoenixing activities—the Phoenix, Black Economy and Serious Financial Crime task forces. Fifthly, they introduce legislation to address the corporate misuse of the Fair Entitlements Guarantee scheme, to protect Australian workers and limit the excessive drain on the taxpayer funded scheme as a result of sharp corporate practices, including illegal phoenixing.
In summary, the government recognises that illegal phoenixing is a very separate activity from legitimate attempts by a business owner or director to restructure where a business may have failed. The Morrison government is committed to tackling illegal phoenixing activity to protect honest and hardworking Australian small businesses, employees and taxpayers.
I'm very pleased to speak on the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, which Labor is supporting, with some amendments. The practice of phoenixing is something I've spoken on quite a few times in this chamber because it is such a big issue in many parts of my home state of Queensland, particularly the Gold Coast, where my office is based.
Unfortunately, for whatever reason, it does seem that the Gold Coast and the Sunshine Coast are real hotspots when it comes to phoenixing activity. Already in my relatively short time in this parliament, there have been a number of very high-profile examples of phoenixing activity occurring—particularly on the Gold Coast and the Sunshine Coast but also in places like Rockhampton and many other parts of my state—that have seen building subcontractors, subbies, totally ripped off to the tune of millions of dollars. Homeowners, who've paid deposits, are also being ripped off by dodgy developers and dodgy building companies who simply don't want to pay their bills and move on from one company to the next.
It has been a really big problem, as I say, across many parts of Queensland and, no doubt, across the rest of the country as well. I have literally met building subbies who have lost their homes because of the bills that have not been paid. I've met subbies whose marriages have broken up because of the financial pressure that phoenixing has put on them. This government has been far too slow in responding to these problems. I've been raising these issues for as long as I've been here. There've been a number of other people on this side of politics who've been raising this for a lot longer than I've been here. I remember Senator Cameron, when he was here, was part of a Senate inquiry—and no doubt other senators were as well—which made recommendations to fix this problem. It was ignored by the government. And a number of other Labor figures, including shadow ministers, have been seeking action from this government for a long time. We're pleased that this is starting to happen in the form of this bill, but there's still a long way to go.
As has been mentioned by other speakers in this debate already, the practice of so-called phoenix activity, where dodgy directors deliberately strip companies of their assets and transfer assets to a related company before intentionally collapsing their business and thereby refusing or claiming to be unable to pay their bills—and it's done in an attempt to avoid obligations to employees, to government and to honest businesses—is estimated to cost the Australian economy more than $5 billion per year. So $5 billion per year is owed by dodgy directors and dodgy building companies to their employees, their subbies and the government—a lot of the time this involves tax bills that aren't paid by the people who owe taxes. Millions of dollars, in fact billions of dollars, are owed to homeowners who paid deposits and to a range of other people. That is a really massive impact on the Australian economy and on people. Marriages are breaking down. There are suicides, unfortunately, which occur from people being on the wrong end of this phoenixing activity and finding themselves in massive financial distress. So this has an economic impact and a really big human impact as well.
In my home state there are a number of places, particularly on the Sunshine Coast and the Gold Coast, which seem to be hotspots for phoenixing activity and subcontractor exploitation. It seems like not a week goes by in Queensland where we don't have another report of this kind of activity occurring.
While I think of it, I want to pay tribute to the efforts of Les Williams and the Subcontractors' Alliance, or subbies alliance. They're a band of subbies who've got together and got organised. They probably wouldn't like being likened to a trade union, but much like a trade union they're standing up for their rights. They have had a lot of success in putting this issue on the agenda in Queensland and getting the Queensland government—the Palaszczuk government—to respond with a number of major reforms. I want to commend the Palaszczuk government on what they've done in respect of this as well. Subbies alliance is continuing to get media coverage to put pressure on all levels of government to take more action. Unfortunately, there is still a long way to go. That's why we keep seeing examples of this phoenixing activity occurring.
One example I can give you from 2017 is the company called Queensland One Homes, which was put into liquidation by its directors. The collapse left 133 tradies and staff out of pocket by about $3.4 million. There were 35 would-be home owners who paid deposits for their homes and have been left in limbo.
This issue has impacted on people in this chamber. The former senator Bob Day's very own company, Newstart Homes, is another example of a company which has been shutdown while owing millions of dollars to suppliers, building workers, subbies and homebuyers who have paid deposits—they're never to see that money again. That kind of conduct is unacceptable. It's damaging to our economy and to our community. The Queensland government has taken steps to stop it, but the federal government simply needs to do more.
Just about every tradie in Australia will have experienced the frustration of not being paid on time or not being paid at all. We need to remember subbies aren't volunteers. They are running a business. They often have employees of their own they have to pay, and they should always be paid in full and on time. We hear a lot from this government—from members of the Liberal Party and the National Party, or the LNP, as it's known in my home state—claiming to be friends of small business. They're claiming to be the people who are standing up for small businesses against big business and against government, but here's a form of small business—building contractors—being left in the lurch, suffering from phoenixing and not being paid, and this government has been prepared to sit idly by and not take action to protect them. It's about time our LNP members of parliament stop saying that they care about small business while doing nothing in response and stop going soft on corporate crooks and start listening to the subbies who are getting ripped off by these people. We've got to close loopholes that are allowing these businesses to take advantage of subbies.
Turning to this bill, which Labor will be supporting as a good first step to tackling this problem, schedule 1 to the bill introduces new phoenixing offences to prohibit creditor-defeating dispositions such as transfers of company assets for less than market value or the best price reasonably obtainable, penalise those who engage in such dispositions and allow liquidators and ASIC to recover such property.
The provisions set out in schedule 2 are aimed at preventing directors and officers from an insolvent company from avoiding personal liability.
This will reduce the incidence of illegal phoenixing activity and its impact on employees, creditors and government revenue. Schedule 3 allows the commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for the company's GST liabilities in certain circumstances. Finally, schedule 4 authorises the commissioner to retain tax refunds where a taxpayer has failed to lodge a return or provide other information that may affect the amount the commissioner refunds. This ensures that taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.
This bill has been subject to a Senate inquiry conducted by the Senate Economics Legislation Committee. Stakeholders, for the most part, supported the bill, but many did note that the government's primary focus should be on amending and enforcing existing legislation, not on developing new, complex legislative amendments and offences. There were also concerns that the proposed measures within the bill are likely to have limited impact, as they are highly technical and will not substantially expand ASIC's power to combat phoenixing.
I might end on that note in relation to ASIC. I think many of us have been frustrated by ASIC's seeming inability to take proper action against companies which are engaging in this kind of conduct. I have asked ASIC about this at Senate estimates hearings, and I know other people have as well. The response that we're always given is that they simply don't have the resources to do the policing job that the government and the community expect them to do. We know that ASIC has limited resources and is unable to pursue all of the reports of corporate misconduct that it presently receives from administrators and liquidators, pursuant to various sections of the Corporations Act. Without additional funding and staffing, it's difficult to see how ASIC will be able to pursue to their full potential the new powers it is being given under this bill. The government simply has to act to ensure that ASIC has the ability to support more difficult court cases without draining the corporate watchdog's resources.
In summary, this bill is a good start. We will be supporting it. We will be proposing amendments. It is high time that this government started taking this issue of phoenixing seriously. I have met too many people in the Gold Coast, the Sunshine Coast, Rockhampton and other parts of the state who have lost their business, who have lost their home and who have lost their marriage because they have been ripped off by dodgy developers and dodgy builders. We've been asking the government to act on this for years. The Subcontractors Alliance has been asking for the government to act on this for years. Ordinary men and women in Australia have been doing so as well.
If this government is serious about being a friend of small business, here is a category of small business that really needs help. They simply don't have the bargaining power to fight for themselves in court to get back what they are owed. They don't have the legislative power to do so either. They need the government to step in and the government regulators to have the proper resources to be able to take action and enforce the laws that already stand on the legislation books.
I rise to speak on the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. This bill has good purpose. This bill is designed to deal with phoenixing, which is where directors set up a company, win work, engage subcontractors and then set about stripping the company of its assets and shut down the company, leaving subcontractors, who are in actual fact the real builders and have done the work, not being paid and leaving staff without pay, leave or their super entitlements being paid. Indeed, the taxpayer ends up with unpaid tax debts, and, of course, that affects the government's ability to provide services. Then a new company, exactly the same as the last, rises like a phoenix. In some cases it's a business model for operators. PwC's report The economic impacts of potential illegal phoenix activity estimates that the annual direct impact of illegal phoenixing activity is between $2.85 billion and $5.13 billion per annum.
I have some real examples that South Australia has experienced. I have a construction industry example. Mr Stephen Thomas and Mrs Angela Thomas were described as early as 2002 in the Queensland parliament as 'phoenixing developers'. For decades this couple have moved from company to company and state to state exploiting loopholes. The companies simply ran up large debts.
The companies have been shut down, and then they simply open a different company and they do it again and again. They've been at the helm of multiple construction companies both in Queensland and South Australia that have collapsed, leaving a trail of destruction and far too many tradies and suppliers unpaid. Many of those tradies are left with those unpaid debts. They remain on a knife edge and some of them are driven into insolvency—as a result of the activities of others. They're forced to refinance homes. As Senator Watt indicated before, it causes marriage breakdowns. It's an awful activity.
In the case of the Thomases, they had several companies—Liberty Homes Australia, Panoramic Homes SA and Omega Homes SA—and they stripped them of assets before the liquidator moved in. This left many creditors, subcontractors and tradies with no recourse to recover any money owed to them. As I said, the effect of this is not just financial; there are human costs to all of this.
In my home state, in relation to tax, in March this year the CDPP will begin prosecuting one of the largest phoenixing scams in Australian history. It's been alleged that sham labour hire companies avoided paying over $20 million in GST and income tax liabilities. The companies are believed to have supplied hundreds of Chinese and Taiwanese abattoir workers, in effect exploiting these workers and not meeting their tax obligations.
The bill makes it an offence to engage in illegal phoenixing activity; creates criminal penalties for directors who engage in or don't stop creditor-defeating asset disposals or dispositions; and allows ASIC to wind back sales of company assets where the sale wasn't on market terms, so that creditors can be paid their dues. If you look at the report by the Economics Legislation Committee that Senator Watt mentioned, you will see that there's general support for the bill and general support for reforms. The ACT government supports reform. The Housing Industry Association supports reform. The CFMMEU supports reform. Maurice Blackburn and Mendelsons Lawyers support reform.
Centre Alliance support the reforms in this place and we'll be supporting the bill. That said, the bill doesn't go far enough. There are some areas where there could be improvements, where there are still loopholes. Circumvention is one of those—the possibility of illegal phoenixing behaviour without creditor-defeating dispositions. It's possible that a company might accrue significant debts yet hold no assets.
It's been suggested that this bill will only encourage some to accrue debt through asset-poor companies, and hold assets in another company. This bill will not touch those, as it's only concerned with companies that engage in conduct that involves creditor-defeating dispositions. We must also remember that the people who are unscrupulous in conducting phoenixing activities can also be smart. They will work around the system. They will find every loophole they can.
There's another area I want to talk about that's important particularly for tradies—that is, security of payment. This bill deals with phoenixing post facto. It seeks to discourage phoenixing of course, but it really just deals with the directors of companies who may have engaged in phoenixing. Whilst it does allow for the pursuit of those directors, it still doesn't provide a remedy for the subcontractors who've done the work and haven't been paid.
John Murray was commissioned by the coalition government to conduct a funded study, a national review of security of payment laws. The review was released in 2018. It was quite a substantive report, containing 86 recommendations which have largely sat on a shelf. One of the most important recommendations was the concept of bringing in deemed statutory trusts across the nation—that is, money paid into a trust before work commenced. As the prime contractor, I engage a subbie. I pay the money for the work into a trust account and I release it against contracted milestones.
That way, if the company goes under, there is still money sitting in the trust. Of course, if the director somehow has taken the money out of the trust, there's fraud involved, and that is a criminal offence.
We see deemed statutory trusts in operation in Canada. About half of the US states have deemed statutory trusts. We actually have security of payment laws right across Australia, but they are a hotchpotch. Some are strong, some are weak and some allow for voluntary trusts—and we need to clean that up. John Murray made a number of substantive, sensible recommendations that have just lain idle. I would urge the government to go back and look at the review because certainly there are things we can do there.
I would point out that the banning of directors who have engaged in phoenixing activity has not really been covered off in this bill. I know Labor were going to move an amendment in this space, and Centre Alliance would have supported it. But I understand the government is now looking at a new piece of legislation that will deal with that in the House, and I trust that the government will proceed with that bill in a timely fashion.
I do have some reservations about the bill, and these really come down to implementation. As we know, schedule 3 allows for GST deemed debts to be based on estimates made by the ATO. I support the concept, but there's a lingering concern in relation to that, and that is that it could be open to abuse by an overzealous official or officials. You might say that that's not likely, but I remind senators that in mid-2017 the tax office engaged in overzealous use of garnishee notices that affected a number of businesses. It involved whistleblowing by Mr Richard Boyle, a South Australian, about matters taking place in the tax office in Adelaide. We've subsequently seen a report by the IGT that confirms that there was an anomaly in relation to garnishee notices in South Australia. We saw that famous 'hour of power' email from a team leader of frontline staff inside the ATO. Richard Boyle blew the whistle on that and has now unfortunately ended up in a situation where he is facing prosecution in Adelaide for charges that may have flowed on from his whistleblowing. I know that the Economics Legislation Committee, having examined some of the documents involved in dealing with Mr Boyle's whistleblowing, will have something to say about that at a later stage.
I have another reservation. Schedule 3 allows the ATO to hold directors personally liable for unpaid deemed GST. Just to be clear, this provision is not tied to phoenixing behaviour; it impacts all directors. I actually understand why we want to do that. There's not a criticism there, but I want to raise a court case back in 1897. It's the seminal court case related to companies as legal entities. In that case, they declared that companies are a separate legal entity from directors and shareholders of a company and that a company has its own separate legal rights and liabilities from that of the directors. The lords—because this is a House of Lords case—were cognisant of the idea that there might be reluctance by people to engage in corporate ventures if they were going to be held personally liable for actions of the entity.
In effect, that case established the corporate veil. The corporate veil is not intended to protect a director from breaches of their statutory obligations. We in fact have a whole bunch of rules set up in the Corporations Act, enforced by ASIC, and directors are required to follow those laws. We don't intend to protect rogue conduct—people who set up an entity for the purpose of ripping others off.
But it was intended to protect people from circumstances outside their control, in situations where a director—and I quote from the court case:
… is not shewn to have done or to have intended to do anything dishonest or unworthy, but to have suffered a great misfortune without any fault of his own.
So, we ask: what happens in circumstances where a company is operating well, has enough money in its bank account to meet its tax obligations but not enough money to pay its subcontractors at this point and is waiting for a payment, and then something like a bushfire happens, and that company can't pay them, for whatever reason? Now the director is faced with a choice: do I pay the subcontractors and keep them going? Some of them are actually caught up in the fire and they may need the cash immediately as well. Or, knowing that there's a liability that will be hung around my neck, do I pay the tax office instead?
I'm just a little bit worried, and I may ask questions at the committee stage about how that might be addressed. And I say this as a director. I was a director of a company. I'll give you the circumstances. I had employed three or four small family subcontracting businesses to do work for me in Malaysia. They did the work. I had enough money in the bank, because it wasn't the only job that my company was doing; I was doing other work. So I had money in the bank to meet all my obligations—certainly my tax obligations—but I didn't get paid by this overseas entity. The sum was, from memory, about $150,000. I had to make a choice as a director: do I take the money that I've got set aside for other things—for the tax office, for example—and pay these subcontractors, knowing that if I don't their family won't eat? In that circumstance I made the choice to pay the subcontractors and I put at risk my own personal liability such that the tax office may end up pursuing me for taxes owed.
I eventually got the payment and everything came good, but this is the reality of business. Cash flow is king. There are circumstances sometimes when things are outside your control and you have to make hard choices. I just wonder whether what we're doing here creates an impediment, a reservation, and I will ask questions about that briefly at the committee stage. It's for this reason that we'll be supporting Labor's amendments, which seek to review the conduct of these laws to make sure that the laws, which are well intended, are implemented in a fair and just manner.
I rise to speak on the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. This is very much another demonstration of our commitment to small business. Of course we've always been committed to ensuring integrity and probity in Australian law, because for 75 years we have stood for middle Australians and for workers, not for any vested interest. So, this has been a common thread in Australian liberalism: probity in Australian governance and legal arrangements. We can talk about the royal commission into the painters and dockers, which had a good look at the bottom-of-the-harbour tax schemes that the Fraser government dealt with, or we can talk about the very significant CLERP reforms that Peter Costello spearheaded as Treasurer, which rewrote Australian corporate law, or even more recently our support for small business, which, as Senator Patrick very rightly said, ensured that small business gets paid on time. The Commonwealth is now paying small businesses much faster than it was in the past. I think if you do an e-invoice you can get paid in five days now. So, this is a common thread and a common commitment: to root out wrongdoing in a targeted way, as we have throughout our history.
At the end of last year, we had a very similar discussion about ensuring probity and good governance throughout our economy in the form of the ensuring integrity bill, which was about strengthening laws so that Australian workers and small businesses can benefit from a certain and strong legal environment. We do think that workers' entitlement funds and the like should be managed properly. We think that there is no room for any form of malfeasance, and we certainly won't stand idly by and watch companies be stripped of, frankly, their requirement to do the right thing. That is the most important thing—because so many of these tradies and suppliers you'll find have actually performed the work and done the job and then these businesses take off.
Effectively this bill will help address illegal phoenixing, which is a very, very significant part of our economy, sadly, at almost $5 billion at the highest estimates. So the bill includes new offences and new civil penalty regimes. It effectively does four things: it amends the insolvency practice rules to restrict the voting rights of certain creditors; it increases funding to the Assetless Administration Fund; it establishes a phoenix hotline to make it easier to report suspect behaviour; and it establishes various task forces.
As I say, this is a common thread of Australian liberalism: always standing up for the workers and small-business people. We don't stand for rip-offs and rorts, and that's what you see across our legislative agenda on almost a daily basis here in this place.
I rise to speak on the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 because it does give me an opportunity, while Labor is supporting the bill because it's marginally better than nothing, to point to the lack of genuine resolve on the government's part to deal with the practice of illegal phoenixing. The people on the other side, the government, really have had a consistent pattern. They've been the friends of unscrupulous businesspeople everywhere and the friends of shonky financial advisers. On this side, we're the friends of legitimate businesspeople who are doing it tough in an economy that is struggling and who want their bills paid on time.
Stripping away the ability of businesses to engage in phoenixing is a core Labor objective. Phoenixing is a crime against honest, hardworking businesspeople. It's a crime against honest taxpayers and it's often, in the examples that I've been involved in in Australian manufacturing and Australian construction, a crime against the people who work hard on behalf of these businesses and who see long-term entitlements ripped away.
This bill is a half-hearted and shallow attempt at combating the criminals who rip off creditors and taxpayers. It sets out highly technical provisions that don't expand ASIC's powers to combat phoenixing and it's likely to have a very limited impact on the incidence of phoenixing. One measure is designed to ensure that taxpayers satisfy their tax obligations and pay outstanding amounts before being eligible for a refund. The bill falls well short of what is required to combat fraudulent phoenixing activity.
That's why, whilst supporting the bill, Labor will move amendments that will require a statutory review to be conducted that will provide further evidence on the need to improve anti-phoenixing laws and to introduce a director identification number regime. The bill represents a slap in the face to small business and the families who have been the victims of phoenixing and have been pleading for legislation with teeth to combat the scourge of shonks, crooks and carpetbaggers whose business model is a parasite on legitimate Australian businesses.
To appreciate how negligent the coalition are when it comes to tackling illegal phoenixing, you only need to look at how much it costs unsecured creditors and government revenue in the form of unpaid tax liability. In 2015, the Senate Economics References Committee conducted an inquiry into insolvency in the construction industry. The inquiry was given impetus by the notorious collapse of Walton Construction, which left unsecured creditors with $70 million in unpaid debt. I'll return to Mr Walton shortly.
As a case study on the incidence and effects of illegal phoenixing, the Senate inquiry into construction industry insolvency is instructive as to how the Morrison government is failing to see what is blindingly obvious to small-business people across Australia: the law relating to illegal phoenixing needs substantial reform; it doesn't need tinkering at the edges. Illegal phoenix activity is rife in the construction industry. It's notorious for its use of illegal phoenix companies, and the industry has played host to some of the most flagrant examples of the practice. The economics committee report says:
The Cole Royal Commission into the Building and Construction Industry found that 'there is significant [illegal] phoenix activity in the building and construction industry, particularly in the eastern states'.
It was Commissioner Cole's only sound finding in that long-running and expensive royal commission.
Initial external administrators' reports lodged with ASIC support the conclusion of widespread incidents of illegal phoenix activity in construction. These reports show that the incidence of misconduct in the construction industry for contraventions associated with illegal phoenix activity under the Corporations Act is significantly higher than in other industries. In addition to external administrators' reports, ASIC receives reports of alleged misconduct directly from the public. ASIC informed the economics committee insolvency inquiry that its misconduct and breach reporting team received 13½ thousand reports of alleged misconduct involving civil and criminal breaches of the Corporations Act in the construction industry between 2009-10 and 2013-14.
According to the Melbourne Law School and Monash Business School, where the prevalence of illegal phoenix activity reaches a critical point, it becomes impossible for reputable businesses to continue. They face a difficult choice: between insolvency or, alternatively, the risk of being priced out of the construction industry. In some circumstances, the non-economic effect of illegal phoenix activity can be considerable. The Collins inquiry into construction insolvency in New South Wales reported that the frustration and anger expressed at the impunity of unscrupulous operators was palpable.
I want to turn now to the Walton Construction collapse. Walton Construction was founded in Melbourne in 1993 by Mr Craig Walton. In 2002 the company expanded, registering a Queensland arm, Walton Constructions (Qld) Pty Ltd. At its height the Walton group had an annual turnover of $300 million. In 2011-12, revenue dropped and the company recorded a loss of $14.6 million. This period marked the beginning of the end for Walton Constructions. In November 2012 the National Australia Bank, Walton's financial backer, reviewed its financial support for the company and commissioned Deloitte to prepare a report on the finances of the Walton Group and its financial viability. In 2013, the company won a major Melbourne project but NAB refused to provide a bank guarantee, so a competitor took over the project—so the bank had begun to figure out what was a secret to Walton's creditors.
Rumours began to spread in the industry and developers abandoned Walton, cutting off critical cash flow. Walton engaged the Mawson Group, a business management consultancy, to advise it. In the lead-up to the eventual collapse in October 2013, Mawson directors worked with Walton directors to transfer projects to two new companies, Lewton Asset Services Pty Ltd and Peloton Builders Pty Ltd. Companies within the Walton group had been customers of NAB since the 1990s. Walton creditors have long maintained that NAB should have done more to prevent Walton Constructions (Qld) from operating, long before it collapsed. When Walton collapsed, NAB knew about the precarious financial situation facing Walton creditors. NAB's failure to appoint a receiver at an early stage meant more unsuspecting subcontractors contracted with Walton and were caught up in the eventual collapse. The issue here is informational asymmetry—the subcontractors didn't know—and between Mawson Group and the NAB and Walton there was a conspiracy to continue the business when it shouldn't have continued.
It was the view of the initial liquidator, PKF Lawler, that Walton had been trading while insolvent for some time before it went into administration in October 2013. As noted above, NAB was in possession of a report, provided by Deloitte in early 2013, indicating that Walton was experiencing liquidity problems. Unsecured creditors believe that NAB must have known the true scale of Walton's financial problems. NAB introduced Walton to Mawson in order that Mawson would implement a pre-insolvency restructure of the Walton businesses, designed solely for protecting the interests of the bank and Mr Walton. NAB denied this in evidence to the Senate economics committee, and that evidence is scarcely believable.
Without wishing to take up my time in the debate going into the minutia of the pre-insolvency manoeuvres, what occurred was collusion in the provision of pre-insolvency advice, designed to facilitate a phoenix operation that caused very significant harm to unsecured creditors and advantaged one of Australia's biggest banks—ordinary businesses being ripped off in the interests of the host company and one of Australia's biggest banks. The practice of providing pre-insolvency advice designed to harm creditors of soon-to-be-insolvent companies is not regulated. ASIC expressed its concerns to the economics committee about the lack of regulation of pre-insolvency advice, citing a number of banned liquidators and administrators operating profitably in that field. This bill does nothing to deal with those questions.
NAB's denials to the Senate economics committee over its collusion with Mawson and Walton are not believable. There is no better authority for this than the Federal Court. In a recent judgement in a case brought against Walton in the Federal Court by Walton's liquidators, His Honour Justice Derrington said:
… it is clear from the conduct of Mawson, the NAB and Mr Craig Walton that none of them sought to advance the interests of the companies and their unsecured creditors and if the companies received any advantage from their actions it was purely coincidental.
He went on to say:
The evidence identified above establishes, and I so find, that the strategies leading up to the entry into the Restructure Agreements and the entry into those agreements themselves were directed to the purposes of extricating the NAB and relieving Mr Walton and his associated companies from potential liability under guarantees to the NAB … They were devised by Mawson for the purposes of achieving the identified objectives.
The end result was to increase the exposure of other unsecured creditors—ordinary small businesses run by Australians in the construction industry—to Walton, while NAB was extricated from its unsecured position.
Another recent judgement of the Federal Court has voided a number of critical transactions that were the result of pre-insolvency advice given to Walton. There will be a class action of creditors against the NAB for recovery of the $70 million owed to them in large part due to the conduct of the bank, colluding with the Mawson Group and Walton to cause harm to unsecured creditors while extricating itself from exposure. There is a statement of claim to that effect. The first claimant is Mr Les Williams, a civil works contractor who has doggedly and determinedly pursued Walton, Mawson and NAB for six long years and was well known to my predecessor in this place, Senator Cameron. It's my sincere hope that Mr Williams and his co-claimants finally find some justice in this matter.
Other senators will speak at some length on the merits of the system of director identification numbers to be introduced. As an ASIC officer pointed out in the economics committee's insolvency inquiry, it is easier to register as a company director than it is to register your dog with the local council. Indeed, two of the 44 recommendations made by that inquiry were that a director identification number be introduced and be backed up with proof-of-identity requirements. The government's response to that report, tabled in May 2017, said:
These recommendations align with recommendation 15.6 of the Productivity Commission's Report on Business Set-up, Transfer and Closure. The Government will give further consideration to Director Identification Numbers as part of its ongoing work to combat illegal phoenix activity in Australia.
Nearly three years on, we are still waiting. We are still waiting because the government is half-hearted in its pursuit of objectives in this area. People like Les Williams—and the victims of dodgy phoenix operators right across the country, particularly in construction, which this government seems determined to prop up—can be justified in asking: 'What is the point of this government? What is the purpose of this legislation?' The legislation makes a marginal improvement in some technical ways that will be unobservable to Australian small business. What is the point of a half-hearted attempt? What Australian small businesses need, particularly in the construction industry, is a government that will stand up for small business, that will stand up for certainty and security, that won't mouth the platitudes and that won't do the bills with the big names that achieve very little. They need a government that's interested in probity and integrity in our industries.
This is a government that, on the one hand, rabbits on about ensuring integrity for their opponents, but when it comes to integrity in the construction industry with illegal phoenixing they have run up the white flag and are nowhere to be seen. They've got the hide, this week of all weeks, to be talking about integrity when they have no integrity after a systematic industrial-scale rorting of $100 million of taxpayers' money designed to advantage them and their friends. The only interest that they show any interest in protecting is their own shallow, narrow self-interest.
enator ROBERTS () (): As a servant to the people of Queensland and Australia, I speak to this bill, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 and to my concerns for everyday Australians who could be affected by illegal corporate phoenixing in many ways. I speak about my sister's business—a wonderful small- to medium-sized business—with her partner, and her employees. They had to fold eventually because of debtors not paying their bills, rich debtors who folded their companies and restarted, just like the phoenix in ancient Greek folklore, the bird that rose from the ashes.
I stand, like Senator Hanson, for everyday Australians, including honest workers and honest business people. There are many people who are concerned about what this bill might do to them. That's important, because small business is Australia's largest employer. But, later on, I will touch on how one very large company in this country is affecting its employees, because regulations are not the only answer. It requires enforcement. I will be speaking in support of the Labor Party's amendment for a five-year review.
A key problem we have to face is the difficulty associated with identifying whether particular phoenix activity is illegal or not. Our concern must be to not penalise those who have the best of intentions for a business, its employees, subcontractors and suppliers. I think you will find many company directors in rural and regional areas who operate small- to medium-sized businesses are hardworking. They will do whatever they can to keep their business going, pouring their heart and soul into the business in good times and in bad. What is more is that the victims of illegal phoenixing activities do not form an easily identifiable group. So there is a challenge for this government in coming up with this legislation.
The victims of illegal phoenixing include unsecured trade creditors, small businesses, individual employees, members of the public, and large government entities such as the Australian Taxation Office. We have also seen this sort of tricky, shonky phoenixing in the building industry, as many previous speakers have said, where it is used to avoid payments to subcontractors and to avoid taxes. It is important to remember that phoenix activity can be entirely legal if a company has to restructure, especially if the value of the failed company's assets is preserved and the employees keep their jobs and entitlements—and that is significant.
I note that the ATO website has stated that fraudulent phoenix activity is one of its areas of focus and that the ATO says that fraudulent phoenix activity occurs when a company goes into liquidation, leaving its debts behind, while the assets are shifted into a new entity that begins trading again, often under a similar name. This deliberate practice of liquidating related businesses and corporate trading entities is a fraudulent exercise to evade tax and other debts accumulated in the name of the failed company. But this is not new, and we have seen its impact for a long time. In fact there are professional advisers out there who specialise in teaching directors and businesses how to do it, and this corruption must stop. So we applaud the government for its initiative.
The ATO deputy commissioner, Mark Konza, in 2009 described phoenix behaviour as 'a deliberate attempt to avoid financial obligations'. He further noted that phoenix activity is a type of tax evasion that 'has the potential to severely erode the revenue base and undermine business and community confidence'. So it's significant in our economy.
Schedules 3 and 4 of the bill were quite concerning to One Nation and to many Australians. Accordingly, we have to ensure we have checks and balances to protect the well-intentioned person—for example, the well-intentioned director or businessperson who salvages a business previously failed due to factors outside their control, such as a Queensland tourist operator whose first company is forced into liquidation or voluntary administration after an airline strike beyond their control or after health concerns about travel. Another example is where a viable business is prematurely liquidated by an overly cautious party who fears insolvent trading liability during a period of poor liquidity, even though the business is fundamentally sound. This should not require everyday Australians to defend themselves in court at great cost because the ATO took a dislike to them. There must be a better, simpler way. That is why Labor's amendment for the five-year review is crucial.
We also need to ensure that proper education is provided to help directors to understand their obligations. There are many small-business people out there who have set themselves up as companies and need to understand what they can and cannot do before they try to salvage their business. We don't want to scare small businesses and we don't want to scare small-business directors, because small business, as I said in my opening comments, is our largest employer in this country. In dealing with this issue, it is also very important to promote debate on the need for improvements to the role of administrators. This is something One Nation has championed for years now.
When I chaired the Senate select inquiry into lending to primary production customers, we confirmed the inherent conflict of interest in the role of receivers and administrators who prey on innocent people and organisations to strip assets. We then pleaded with the Turnbull government to include administrators and insolvency practitioners in the financial services royal commission's terms of reference. Yet Mr Morrison, as Treasurer, and Mr Turnbull, as Prime Minister, refused. This bill still leaves the door open for administrators to strip a company's funds, leaving nothing for creditors like subcontractors. Putting an organisation into administration must take account of the impact on, and the protection of, the interests of all stakeholders and minimise the costs that administrators can charge. This is really important, and the government needs to step up here.
It makes it hard to support this bill while successive Liberal-Labor governments continue to enable administrators to strip assets and to line their pockets. That is another reason for the review, and we support Senator McAllister's amendment. The government must provide real and effective legislation and regulations to end the administrator's inherent conflict of interest and to set real boundaries to ensure protection for honest directors' rights and creditors' benefits.
It is also worthy to note that complex illegal phoenix activity is sometimes likely to attract other forms of illegality, such as the use of false invoices, including GST fraud, the use of false identities, fictitious transactions, money laundering and/or visa breaches and misuse of migrant labour. Illegal forms of phoenix activity have been linked to certain industries in particular—those being the building and construction industry and the financial services industry. This has been the subject of many prior reports and academic papers. This sort of activity, phoenixing, requires an integrated approach from all regulatory arms. I trust consideration will be put into this approach in terms of data sharing and strategy.
I want to deviate for a minute now, because the government has been found wanting in the Hunter. While I'm pleased to see the government crack down on phoenixing, I will continue to watch a situation in the Hunter that is unfolding every day under the noses of Liberal state and federal governments and ministers, and under the noses of Labor members of parliament who have been informed and know what is going on. It involves specifically the labour hire firm Chandler MacLeod, and BHP, the giant globalist. I have a question. Will Chandler MacLeod's multinational owner, Recruit Holdings in Japan, consider phoenixing Chandler MacLeod to avoid the liability they have created through unfair employment practices? If they do phoenix, this could affect government services. For example, the ATO itself employs Chandler MacLeod casuals.
In this chamber, in Senate estimates and publicly, I have repeatedly raised BHP's exploitation and abuse of hundreds of supposedly casual workers in the Hunter Valley who are actually working full-time coalmine production rosters at its Mount Arthur mine. It did so using the foreign owned Chandler MacLeod labour hire firm that did a deal with Peter Jordan and other Hunter Valley CFMMEU bosses. This set-up sees management breaking the law, with workers being threatened, to prevent the reporting of serious injuries; workers enduring needlessly hazardous conditions without proper workers compensation or accident pay; workers underpaid by as much as around 40 per cent; and workers stripped of basic leave entitlements, long service leave and possibly superannuation.
These are breaches of federal and state laws that continue five years after they were first identified. Yet local and state and federal MPs—Labor MPs—have abandoned the workers who pleaded with them. Indeed, Labor's Joel Fitzgibbon is publicly selling the deceptive message that the issue is about casualisation, when that is the tip of the iceberg. His public statements deflect and hide the real problem: the huge scam that exploits workers that his mates in the Hunter Valley area CFMMEU, such as Peter Jordan, have endorsed and overseen.
The federal Fair Work Commission has contradicted federal legislation. New South Wales Liberal government ministers have ignored miners' documented evidence and failed to fulfil their responsibilities. I must thank Senator Marise Payne for listening to the concerns regarding the abuse of casual mine workers in the Hunter Valley when I raised it in Senate estimates. I appreciate the federal Attorney-General's Department checking and endorsing the miners' documents, showing that they are correct. I also want to compliment Senator Jim Molan, who I approached on this last night and who is promising to pursue it. Why, though, is the government not pressuring the New South Wales government to fulfil its responsibilities? Apart from One Nation and Senator Marise Payne and Senator Jim Molan, no-one is working to meet these three aims: firstly, paying miners their legal and moral entitlements, as well as compensation for the trauma and suffering that they continue to endure; secondly, ending the exploiting of casual workers across the industry; and, thirdly, bringing BHP, foreign owned Chandler MacLeod and the CFMMEU's Hunter Valley union bosses, including Peter Jordan, to justice. It is thanks to the trusted One Nation team, including Stuart Bonds, that BHP's abusive practices are being exposed—and last night Mark Latham, in the New South Wales Legislative Council, committed to chasing this and holding the New South Wales government accountable.
Chandler MacLeod today—what will be their name tomorrow? How will this phoenixing legislation work with multinationals? When large companies, and they don't get much larger than BHP, can ignore and break laws with impunity, we need the five-year review in the amendment that Senator McAllister is moving. We will continue to hold BHP, Chandler MacLeod and the Hunter division of the CFMMEU accountable until all three of our aims are achieved.
As I stand here today, I seek the government's assurances that they have both the commitment and the resources to ensure that illegal phoenixing is stamped out and that non-illegal phoenixing activity to save companies will not be penalised. I also believe that, if this government were serious about this, it would turn to improving the role of, and the checks and balances for, administrators and receivers, saving us all a lot of money and a lot of pain. On balance, with some reservations, we support this bill.
I rise to make some comments on the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. This bill is designed to address fraudulent phoenix activities or the intentional stripping and transfer of assets from one company to another, usually a related entity, making the original entity insolvent. Phoenix activity is estimated to cost our economy around $5 billion annually and has particularly significant impact in the construction industry. Unfortunately, the construction industry rate of insolvency is out of proportion to its share of national output. Over the past decade, the industry has accounted for between eight and 10 per cent of annual GDP and roughly the same proportion of total employment. Over the same period, the construction industry has accounted for between one-fifth and one-quarter of all insolvencies in Australia. It is argued that this is because of illegal use of phoenixing.
However, in Australia one of the difficulties in assessing the incidence, cost and enforcement of phoenix activities is the lack of reliable data. Company creation and liquidation is not evidence of illegal activity. A high rate of insolvency in the construction industry does not automatically mean phoenixing has occurred in every case. People associated with the industry warn that, when the incidence of illegal phoenix activities reaches a critical point, other companies in the industry will face a difficult choice between succumbing to the same illegal behaviour and risking being priced out of business. This is what legislation must aim to address.
There are also some characteristics of the construction industry that make debt recovery particularly difficult. The subcontracting system is a key feature of major building works. The head contractor undertakes to perform the contract and is paid for it by the client. Work is then contracted out through layers of subcontractors. The various layers of subcontractors must complete statutory declarations that they have paid their employees and other debts in order to receive payment from the contractor above them. We've heard that false statutory declarations are common and prevalent within the industry, and ASIC is currently investigating this.
Recovery of unpaid wages and entitlements is also fraught. Employees may not be sure of the company name of their employer, which may change from pay slip to pay slip, and may remain unaware that their employment is now with a new employer who has no liability for the wages or other entitlements accrued previously. The industry employs high numbers of temporary migrant workers whose knowledge of their entitlements may be minimal. Backpackers on 417 visas can lose their employment and their employer sponsorship if they question the payment of their entitlements, and they are then forced to return home. Recovery of redundancy entitlements is especially problematic in the construction industry.
However, as noted by many stakeholders and by Labor senators in the Senate inquiry into this bill, the bill is likely to have limited impact. Therefore, Labor is proposing amending the bill to include a schedule that would implement director identification numbers. This would require company directors to be registered with a unique identification number on a government registry following an identification check. DINs were an election commitment of Labor going into the last election and are supported by many stakeholders as being an effective measure to combat fraudulent phoenix activity.
The ACTU and the Small Business and Family Enterprise Ombudsman are supportive of this, because, currently, it is difficult for regulators to track directors who regularly engage in phoenixing activities. DINs would address that issue. It must be noted that, if the government votes against this amendment, they will be voting against their own policy. I also note that the bill introduces new phoenixing offences to prohibit credit-defeating dispositions of company property, to penalise those who engage in or facilitate such dispositions and to allow liquidators and ASIC to recover such property. These proposed measures are likely to have limited impact. They are highly technical and will not substantially expand ASIC's power to combat phoenixing.
Labor has agreed to proposed amendments to the bill that will require a statutory review to be conducted. This approach is supported by stakeholders, including Professor Anderson. These amendments should be supported by the government because these amendments will improve this legislation. This review would provide better evidence for any future reforms to phoenixing law and would provide additional support for ASIC to enforce processes. We are trying to make this legislation into better legislation. I urge the government to support our amendments.
I stand to make a quick contribution to the debate on this bill, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. I know what an absolute time bomb this has been, ticking in this nation for many, many years. I know that there's been a great lot of work done by former senator Doug Cameron, and I know how passionate he was. We've all heard of instances in the building industry. But let's not turn a blind eye: this has also been a massive problem in the transport industry, and in the road transport sector predominantly. It's been rife in certain states. I've witnessed it and it's absolutely downright disgraceful—and nobody has given a damn. You have to actually be there: when you find out that a building company or transport company or anyone has gone broke—and I've heard contributions from all senators on this. Unfortunately, it happened in my family, where my brother-in-law's transport company went broke through no fault of his own. So it's a much broader issue that we have to look at.
There is nothing worse than when a transport company or any company goes broke because some mongrel further up the chain has decided they're not going to pay their bills. There is nothing more frustrating when you see those same so-and-sos coming out the next day, as we've heard before, like they're rising from the ashes. And for governments and regulators, it's in their face—it's right there in front of them: these same so-and-sos have stripped companies, refused to pay creditors and refused to pay workers. And no-one cared about it. All of a sudden, we've got the government thinking, 'Maybe we need to be doing something.' You need to go a hell of a lot further. I believe that, in this nation, if you are a director or whatever you may be, and you have blatantly operated while you're insolvent—shifting assets or something like that—and you have not only not paid your contractors and suppliers but also not paid your staff, these should be jailable offences. I think these people are the lowest form of life in the industrial arena; I really do.
I've had instances in my office in Perth, in my previous life, where truckies have come to us or forkies have come to us with absolutely no idea what is happening—the director has disappeared; the manager has disappeared; the manager's wife's BMW has moved out of the parking bay that she's normally had, or they've come back in to collect stuff, but they don't suffer a thing. How in this nation, today, can anyone in this world get up in the morning and think, 'How can I destroy many, many lives through being an absolute mongrel of a'—I was going to say human being, but they're not human beings. So I urge the government: go further. Adopt the Labor amendments. Adopt every amendment. Review this bill. We should be leading by example in this nation and saying, 'If you want to break the laws and create destruction through family breakdowns and destroying businesses, there will be consequences.' And I urge the government: don't stop there. Go a heck of a lot further.
I rise today to speak on the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. I've been in the chamber for just a couple of minutes to hear the contribution of my colleague Senator Sterle, and I wholeheartedly support and endorse his comments. This is a problem that real people around Australia see every day. This government have been in for nine years—or is it eight years? It feels like forever! They've been in for so long, for three terms of government, when they could have actually solved this problem. The sad reality is: this is just not a priority issue for this government. For far too long in this country, phoenixing directors have attempted to circumvent justice and creditors by stripping their companies of assets and resurrecting them again under other names to escape their obligations. The new businesses perform in and operate the same kind of business as that of the companies that were liquidated but with none of the pre-existing liabilities. It's like going to a shopping centre: you load up your trolley with goods and you don't pay for them; you just walk away. It's just not adequate. It's absolutely not satisfactory. This leaves creditors—usually small businesses, contractors and employees—with nothing while shonky directors escape without any penalty.
The matter of phoenixing arising from a supposed death—which is not a real death in the case of many of these businesses—is especially pernicious in the construction industry. One part of the construction chain goes bust and runs away. It can jeopardise an entire project, risking investment and, importantly, jobs, particularly for so many small-business owners who are subcontractors in the construction industry. They employ people in their local communities, particularly in regional Australia. It impacts powerfully in the most awful way. Families and businesses need better regulation from a government that thinks it can just show up and do nothing to assist the hardworking people of this country.
ASIC commissioner, John Price, said a few months ago that the current laws, on the watch of this government, make it difficult to pursue directors who liquidated a company to phoenix and avoid debt. Commissioner Price also stated that there is currently a lack of legislative definition, which makes it very difficult for the regulator to do their job. The legal loopholes over which this government has presided must be shut and confidence needs to be returned to our small-business sector. Every day we delay and every day we allow another dodgy director to get away with more money being lost to our small businesses, more contractors, more investors and more creditors are being ripped off.
As my colleague in the other place Dr Andrew Leigh said, business runs on trust—it's the oil in the wheels of commerce, but phoenix activity puts sand in the gears and makes it harder for good businesses to just get on and do the job. This malicious practice costs the economy around $5 billion annually, including $3.2 billion in unpaid bills, $300 million in unpaid employee entitlements—that's a conservative estimate—and $1.7 billion in unpaid taxes. In addition, there are compliance costs, according to the report from PwC.
The Labor Party, in opposition, have been calling for action on these shonks for years—not just since the recent election but for years. We've been calling for the government to act, but we've seen a government that have dithered again and again, refusing to support small businesses and employees by bringing an end to this malfeasance. You have to wonder what it is that they show up to do here every day when they can't even look after something as simple as this: a small change to make it possible for this practice to disappear from the Australian economy. What are they doing here? What are they doing here apart from some great PR job about how they care about small businesses—all the small businesses that they presided over that have been going down the tubes over the last three terms of their government. There's a gap between reality and the lies that we see from this government.
This bill was allowed to lapse before the last election and has been continually delayed since then.
Industry groups have been calling for reform for years. Back in 2017, a report by academics from the University of Melbourne and Monash University called for action from ASIC and the parliament to crack down on pre-insolvency advisers who have a business model of giving business owners advice on how to avoid their creditors—a shameful business practice, but a growing business sector under the watch of this government. Advocates have also called for director identification numbers as well as greater transparency on director history and the removal of fees for ASIC searches. Basically, this is so you're known. All they have to do is make sure the directors are identified and that their history of practice in business is accessible to people who can do a search through ASIC. That's what is being asked for—that simple process. Technology allows it. The will of business wants it. But this government is found wanting and lacking in action.
In the three years since that crucial report landed, these issues have been continually postponed, delayed and allowed to lapse by a government that lacks the will, the wit and the wisdom to act in the interest of small business. Just like with the banking royal commission, the government is refusing to ensure integrity in the business sector by failing to act. The government are incapable, it would seem, of being moved to action on anything except persecuting their enemies and doing the bidding of their very big business mates—at the cost of small businesses right across this country.
While this bill does take many of Labor's points and recommendations, it's likely to have a limited impact as it has been constructed by this government due to the watering down of appropriate recommendations made to the government. The bill takes recommendations from industry leaders and victims that have been crying out for action and it outlines measures to introduce a new offence to prohibit creditor-defeating disposition of company property, to penalise those who engage in or facilitate such dispositions and to allow liquidators and ASIC to recover such property. The bill allows the commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances. The bill also authorises the commissioner to retain tax refunds where a taxpayer has failed to lodge a return or provide other information to the commissioner that may affect the amount the commissioner refunds. This ensures that taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.
I and the Labor Party are supportive of these sensible measures to address fraudulent phoenix activity, and that is why I also support the director identification numbers as a crucial and overdue reform. During the last election, Labor committed itself to director identification, because it knows that this will allow the regulators to track directors who regularly engage in phoenix activity. The measure is supported by relevant stakeholders who have a deep and abiding interest in this issue, such as the very active Australian Council of Trade Unions, who stand up for workers across this country day in and day out. Thank God somebody is standing up while this government is presiding over the abandonment of small businesses and the workers who are employed in them. The Small Business Ombudsman supports this change. Sadly, the changes that are recommended by both the ACTU and the Small Business Ombudsman—an appointee of the government's own choice—are missing from the original bill from the Morrison government. We cannot continue with half measures to combat this phoenixing problem.
It's clear where the government's priorities are if one takes a glance at last year's legislative schedule. What was on this government's agenda? Smashing workers and their representatives with their farcical and absolutely disgracefully named ensuring integrity bill was on this government's agenda. That is what they wanted to do, not to look after companies that needed protection from shonks who seek to exploit them. The government had on their agenda brutalising sick refugees by repealing medevac laws that allowed refugees in a critical condition to receive needed medical care. This is a government with no decent agenda and no plan of benefit for the Australian people.
Half the coalition room yesterday spent the day of condolence squabbling amongst themselves rather than focusing on the reality of constituents, across this great nation, whose homes were destroyed by blazes. And when we see Senator Bridget McKenzie continue to lead the Nationals in the Senate, even after being forced to resign from the cabinet in disgrace, we have just a small indication of the chaos that exists within this government. This Morrison government, this third-term Liberal-National government, has no plan to deal with things that matter to Australians, no plan for climate change and no proper plan to respond to the bushfire disaster, where they were found not only absent but profoundly wanting. They have no plan to deal with stagnant wages. They have no plan to sort out the chaos in their own midst. Instead, they have delayed until now a real plan to crack down on dodgy directors, despite nine months passing since their re-election.
This is not the first time the government has passed the buck when it comes to measures that significantly affect the construction industry. The Morrison government and Minister Andrews consistently refuse to support federal funding to remove cladding and delayed—for months—a national approach to the building certification crisis. So if you're a tradie out there and you bought the nonsense from this government that they're there for you, this bill shows you how wanting they have been for three terms. People in business who build and construct roads, buildings, infrastructure vital to this nation, have been abandoned by this government for nine years, and no amount of PR from Mr Morrison—who has great marketing experience but not enough capacity to lead the nation—should persuade any tradie across this country to vote for the Liberal Party ever again. They abandoned you. The consequences are known to you by people who are in your industries, who have been subject to the sort of sham business practices of those who've been allowed to continue to phoenix while this government's twiddled its thumbs. This government kicked the issue to the states and abdicated its moral responsibility to look after homeowners, refusing to work collaboratively with states to ensure that a disaster like Grenfell doesn't happen again.
Labor supports a statutory review into phoenixing that will provide evidence for future reforms to phoenixing law and additional support for the regulator's enforcement processes. We cannot just chip away at the sides of the issue and announce 'job done' like this bill, apparently, wants to convey. What we need to do is give ASIC the powers to tear dodgy directors out of the system, root and branch. Every year that we delay a fulsome, robust and honest response to this problem facing Australian small business is another $5 billion out of the pockets of taxpayers and contractors. That's $5 billion not moving around in our economy, because this government is too lazy and distracted by its own internal problems to get on and do the job of governing in the interests of the Australian people. We need to continue the fight against the black economy, certainly, and we need to keep the ball going on reform. The director ID number reforms have been kicked into the weeds too many times and I'm glad that we're finally getting some movement on this issue from those opposite.
Labor will continue to take the lead from opposition—and that's a pretty hard thing to do—against dodgy directors and we will continue to drag this very lazy and distracted government kicking and screaming with us until they crack down on shonky operators and other lurk merchants. We must do better. These commonsense measures are about protecting business, protecting workers and protecting the Australian taxpayer from being short-changed, from being ripped off by those who care nothing about the interest of the community in which they operate.
We stand with industry groups. We stand with hardworking Australians. Labor stands by people who play by the rules. Finally, this government moves slowly towards cracking down on those who would rip off Australians. Well, we're watching, we're pushing and we will not let this government off the hook. Small business knows Labor is standing with them for fairness in the workplace.
The Greens support this bill, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, but we wholeheartedly agree with the Labor Party that it doesn't go far enough. We know phoenixing is emerging as a significant issue in the building industry, and a huge part of that has been around the cladding crisis—the flammability and the dangers around dodgy cladding. For those who aren't following the debate in detail, phoenixing activity quite simply is when a new company is created to continue the business of a previous company that has been deliberately liquidated by its owners to avoid paying its debts or meeting its liabilities. Those liabilities and debts can relate to creditors, can relate to payments to subcontractors and can relate even to wages to staff and to workers.
Nationwide, phoenixing across the board has been estimated to cost $5.13 billion a year in unpaid bills to trade creditors, in lost employee benefits and in unpaid taxes, all of which affects the economy in this country—even the parliament in this country, the laws we pass and how we operate. The best example that's probably brought this to the public's attention—and I have no doubt has led to this federal legislation that we're seeing today—has been the crisis in Victoria, where this has been a huge issue for at least 12 months now. The Hickory Group is a prime example. Twenty-five properties built by Hickory Group have been identified by the Victorian Statewide Cladding Audit as being non-compliant or having non-compliant cladding. At least 17 of the company's non-compliant buildings, some of which have hundreds of apartments, have been rated at high risk or extreme risk of fire.
As of September 2019, Michael Argyrou of the Hickory Group had been a director and/or secretary of 40 companies which are now deregistered. Two more of those companies of which he was a director are in administration, and three are in the process of being struck off the company register after the company sought voluntary deregistration. George Argyrou, the Hickory Group's joint managing director, is a former director and/or secretary of 27 deregistered companies.
The Hickory Group is winding up three of its companies, while two more remain in administration. One, H Buildings Pty Ltd, was wound up, owing its secured creditors $100 million and paying out its unsecured creditors just 0.4c in the dollar. H Buildings was facing up to 13 claims for rectification works in the Victorian Civil and Administrative Tribunal, four of which were cladding related, when it was placed into voluntary administration in August.
People who buy these apartments in good faith are tearing their hair out dealing with these dodgy building companies and the cladding crisis. These companies are essentially shirking their responsibility and forcing desperate people living in apartments covered, effectively, in highly flammable materials like petrol to start an expensive pursuit of these companies and their directors through the courts.
We have an opportunity, especially after the Victorian government brought it to the federal government's attention last year. They looked at Victorian state laws, and Daniel Andrews is on record as saying that he needed federal government assistance to take a federal approach to this issue. That no doubt has led to the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, which is before us today.
The Greens will be moving an amendment in the committee stage, and our amendment effectively does two things. The first is to look at, essentially, a chain-of-custody approach to materials that are either illegal and have been installed illegally or potentially dodgy and present a threat or are dangerous to owners of these buildings. We would like to create a duty for directors and officers of corporations that design, manufacture, import, supply or install external wall cladding products to take all reasonable steps to keep up to date with new cladding products and standards and to understand the safety risks, and to take appropriate steps to minimise and remove those risks. This, we believe, will help stop directors like we've seen with the properties built by Hickory Group.
The second, and I think most important, part of the amendment gives the courts the power to disqualify a person from managing corporations for up to 20 years if they are a director who engaged in phoenixing activity, and that can be determined using the existing framework of the act; the company, at any time, designed, imported, supplied or installed wall-cladding products that were non-conforming according to the National Construction Code; or the court is satisfied that the disqualification is justified with regard to their conduct or any matters the court considers appropriate.
I understand Labor have put up their own amendments, which, of course, take this bill and the punitive measures in this bill further. If we're going to bother with federal legislation, we want federal legislation that's got teeth and will provide a disincentive to dodgy behaviour. We don't want to see companies that have installed non-compliant cladding getting away with it, as they have been. This amendment could be prospective looking forward, but then what do we do about the thousands of people and apartment owners seeking justice against directors and companies that may have, in some cases, knowingly put cladding on a building when they knew it wasn't fit for purpose? They may have well done that for their own reasons around their own profitability and costs, so we would prefer to see retrospective legislation with regard to these increased penalties.
If you look at the behaviour of the building industry itself and some of the public statements that have been made, they're happy to see this kind of activity crackdown, but notice that they don't want it to be retrospective, particularly in Victoria. On 26 November last year a story appeared in The Age about how the Master Builders Association wants an amnesty for builders to come forward and report potentially deadly flammable cladding without fear of prosecution. So, instead of facing the music, the peak industry body wants every single building company that has installed this dodgy stuff to get a free pass. We shouldn't allow that to happen. The parliament, we believe, needs to give the courts and ASIC the ability to go after these dodgy building companies fearlessly. Retrospective legislation is one important way to short circuit this phoenixing crisis in the building industry, and we believe, if we're going to have legislation here today—just to reinforce this point—it needs to have teeth, it needs to be a disincentive for dodgy behaviour and there needs to be consequences for breaking the law.
We believe, with the bill before us today, this is a very unique opportunity to have a strong, all-of-government response to the cladding crisis around this country. We don't know how deep that's going to go or how many companies haven't come forward, but we suspect that we're going to need billions of dollars to fix this colossal market failure, much of which, we believe, should come from a levy on the companies responsible. In the absence of that, or even with that, regular people, indeed the courts, require the ammunition and the toolbox to go after these dodgy builders, and we believe our amendment provides a simple way to give that to them. I would urge that all senators consider the Greens' amendment. I think my colleague Senator Faruqi will be talking to that further in the committee stage. So I urge all senators and all parties to consider supporting the Greens' amendment, and let's bring these dodgy directors of building companies to justice.
Today we're of course debating the very important legislation before us that combats illegal phoenixing, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill. This is an issue that costs everyday Australians a great deal of money. There's a big cost to the Australian economy, but, when you drill down to an individual level, subcontractors, creditors and workers are out of pocket and, in many cases, unpaid. We know that this is a process where a company director transfers assets from one company to another, disposes of them or just has them disappear privately, but when these assets transfer from one company to another, usually a related entity, the original company can be left with debts and no assets when the liquidators come in and wind up the old company.
We see that contractors, employees and creditors aren't paid. We see that subbies take a significant hit, and this can mean lost wages and lost superannuation.
I note, for example, that the government some time ago put in place the Fair Entitlements Guarantee. That is an important initiative that has seen many workers' entitlements protected. However, it doesn't protect subcontractors, and it doesn't take the stress off subcontractors who have to pay their own workers when they've missed out on their own payment from a company that they've been contracted by. So the Fair Entitlements Guarantee is not a panacea to these kinds of issues, and it leaves a significant liability to the taxpayer, when we know that these assets and the assets that should be there to pay these entitlements and to pay subbies have been moved around.
We know that workers are forced to line up behind secured creditors, meaning that they're often unlikely to recover entitlements like superannuation, which aren't covered by the Fair Entitlements Guarantee. As other speakers have highlighted, it also means that, with building faults and abandoned contracts—where someone's been contracted for a new build or a new kitchen—consumers are left considerably out of pocket. Consumers can move into a new building and find that there is no way for building faults to be addressed. This has happened to many people that I know—tenants in a building where the landlord is struggling to fix the issues with the building because the builder of that building has gone broke. This leaves tenants and landlords and owners of the building really in a very difficult place, because, if a building needs major reparations or reform to meet building standards, then they've got nowhere to go. That's despite the fact that the company which delivered that product that really didn't meet standards has moved their assets elsewhere and is still building homes or doing other activities that repeat the cycle over and over again.
I'm going to touch on ACTU's submission to the inquiry into this bill. It really brought home the impact of phoenixing on workers. Sadly, the clothing, textile and footwear industry in Australia does see these kinds of issues arise. The secretary within the CFMEU said: 'It was the hardest part of my job when I had to walk out of creditors' meetings and address groups of textile workers and tell them there's nothing left, "Your wages and superannuation are gone." These are working-class people, sometimes people who'd worked 10 years or more on low award wages, and I had to tell them that there's no money.' This is a significant issue in the clothing, textile and footwear industry and was raised by the union in Australia.
I want to say that the capacity of companies to have this kind of bad behaviour, where they've left behind their own workers, also undermines the competitiveness of Australian-made companies in the clothing and textile industry who do the right thing.
It's an incredibly negative thing to see this kind of phoenixing take place in Australia's clothing and textile industry—where they will pick up again and create new products and continue to underpay workers in the industry.
I'm delighted to say today—and it's just by coincidence, though I do wear a lot of it—that the dress I'm wearing, which I think is fantastic, is made by Cue. Cue is one of those companies that has high ethical standards in their wages and labour in Australia and does in fact employ Australians and has been recognised for their labour sustainability. The job of companies like Cue is made much harder when there are phoenixing activities, particularly activities where companies don't pay their tax and don't pay the superannuation of their staff. They make significant savings but they take the profits of that, they cut it out of the company and they move it into a phoenix company. This is not fair on other companies that do the right thing. It's the same in building. It's the same in clothing and textiles. These are important issues that really must be addressed.
It's one of the reasons that Labor has put forward the need for all company directors to have a number that is connected to their personal identity irrespective of whether they turn up in a new company at a later date. People really do need transparency around these issues so that other subcontractors and workers can see that it's the same dodgy people behind these practices.
As evidence before the inquiry showed, PricewaterhouseCoopers suggested that the cost to the Australian economy of illegal phoenixing could be more than some $3 billion a year. It's clear in that sense that it costs all of us. We're very proud in the Labor Party that we think these are key issues and that we've been on the forefront of driving for action on them. We want to see company directors that wind up these companies, leaving workers, tradies and suppliers up the creek without a paddle, held to account.
We believe the government has been very slow in coming to the table on these issues and has been sitting on its hands for too long. We are very supportive of the legislation that is before us, but we very firmly believe that it doesn't go far enough. Like I said before, we want to see a commitment to act on director identification numbers. Directors should have to provide 100 points of ID. Give the regulators the information that they need to properly tackle this problem at its very heart. Today it takes less ID to start a company than it does to open a bank account.
There are a great many stakeholders that support this reform: the Institute of Company Directors, the Small Business and Family Enterprise Ombudsman, the Productivity Commission, the Tax Justice Network, trade unions, the Australian Restructuring Insolvency and Turnaround Association and the Australian Chamber of Commerce and Industry. The government has in the past refused to vote for this policy. We are appalled that the government would deem it to be appropriate that it is possible for these shonky operators to continue to be able to rip off small businesses and their employees.
Some have also suggested that the bill in its current form won't be a silver bullet that solves the problem of illegal phoenixing activity. Indeed, Australia's foremost expert on phoenixing, Professor Helen Anderson of the Melbourne Law School, highlighted these issues to the Senate inquiry: ASIC already has the powers to prosecute these issues, but the key issue has been about the resources that ASIC has and the need to amend the existing legislative framework, not to introduce new legislation and the new framework that we see here.
The Australian Restructuring Insolvency and Turnaround Association highlighted that existing legislation contains the tools to address illegal activity. Chartered Accountants Australia and New Zealand also expressed this view. They expressed very clearly that it could be better addressed via amendments to existing law rather than the new legislation we have before us. They said:
… we support reforms to combat illegal phoenix activity, however we consider that this could have been achieved via amendments to existing laws rather than new, highly complex legislation.
It is, in that sense, a shame to see this legislation described as 'highly complex' at the same time as we have existing regimes sitting alongside it. It makes it very clear that the government should have given some attention to amending the existing regime. This was a very common theme. We in the Labor Party acknowledge these significant concerns. We believe it's appropriate to assess whether these reforms are working, and we will be moving an amendment to this end within the legislation before us.
The lack of focus on enforcement that currently exists and that this legislation doesn't fix means that there is very little deterrent effect on those operators who engage in this kind of activity. We want to see the resourcing of ASIC improved. They have limited resources to address these issues and to go after all the different kinds of misconduct reports that they receive. The ACTU highlighted this before the Senate committee. They said:
Whilst the proposed amendments may make ASIC's task in prosecuting illegal phoenixing behaviour easier, they will be of little value without a significant increase in ASIC's resources and willingness to deploy them forcefully.
So, with these scarce resources to prosecute its current remit, it is very difficult to see how ASIC will be able to fully utilise its new powers. We want to see the government focus on resourcing the corporate watchdog so that it is able to work through prolonged and difficult cases without draining its resources.
So we on this side of the chamber, in the Labor Party, are looking forward to making sure that these reforms are resourced and that the instruments are properly implemented by this government to ensure corporate integrity and good behaviour in our country. It is simply not right that creditors, contractors, tradies and workers are the victims of illegal phoenixing in this nation. We must act to protect them from dodgy operators.
Labor welcomes the government's legislation to combat illegal phoenixing, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. We have been calling for action on this issue for some time, and we're pleased that the government is finally coming forward with a bill that will strengthen the powers of regulators.
The practice of phoenixing involves stripping the assets of a company to avoid paying debts. The assets are then transferred to a new company which continues the same business activity, usually under a new name, while the creditors of the old company are left out of pocket. This practice is unlawful and is a form of theft. It robs legitimate businesses who do the right thing of their income, and it robs workers of their entitlements. It also robs the Australian Taxation Office of GST, income tax and other revenues to which they are entitled, placing an unfair burden on public services and other taxpayers. PricewaterhouseCoopers estimates that phoenixing cost the Australian economy at least $5 billion just in 2016-17. This includes $3.2 billion in unpaid bills, $300 million in unpaid employee entitlements and $1.7 billion in unpaid taxes and compliance costs.
While robbing the Australian economy of $5 billion a year is unconscionable, what is even more tragic is the individual stories of creditors who have been impacted by this crime.
Workers are no doubt amongst some of the most vulnerable creditors, as they rely on their fair entitlements for day-to-day living. In their submission on the exposure draft of this bill, the Australian Council of Trade Unions talked about the impact of phoenixing on workers. Their submission quoted Vivienne Wiles, an industrial officer with the CFMMEU, who recounted having to break the news to textile workers that their entitlements had been stolen. Ms Wiles said:
It was the hardest part of my job when I had to walk out of creditors' meetings and address groups of textile workers and tell them, 'there's nothing left, your wages and superannuation are gone'. These were working class people, sometimes who'd worked ten years or more on low award wages, and I had to tell them that there's no money.
This would be devastating news to any worker and their family. I ask those on the other side to imagine how they would feel if all of a sudden all their superannuation was just gone and they weren't able to access it.
We've heard numerous examples this morning from a lot of other speakers about the broad range of areas impacted by illegal phoenixing, like building and construction and textile workers; Senator Sterle gave some examples in the trucking industry. It is very, very broad ranging. It's particularly galling to know that practitioners of illegal phoenixing can carry on in another business, having stolen the entitlements that workers and their families rely on to pay the rent, put petrol in the car and put food on the table.
Fortunately, there have been some successful prosecutions of this crime. I'm aware, for example, of a case of illegal phoenixing in my home state of Tasmania that was brought to court by the Australian Securities and Investments Commission. Amy Timko was the sole director of a business called, ironically, A Twisted Little Company, or ATLC for short, which operated noodle-box franchises in northern Tasmania. She sold the plant and equipment of ATLC to another company for $30,000 and authorised the transfer without receiving payment. ATLC then went into liquidation, and its franchise lessees were reassigned to a new company, contrary to franchising agreements between ATLC and the franchisor. Ms Timko received a two-month suspended sentence and was disqualified from being a company director for five years.
An Australian Taxation Office crackdown on 340 companies which were audited for phoenix activity in 2018 resulted in $270 million in tax bills being issued. While some people who engage in phoenixing are successfully caught and prosecuted, it is a practice that has persisted despite attempts over decades to crack down on this bad behaviour. Sadly, if the PwC report is accurate, the successes that our agencies achieve are really only scratching at the surface of the issue. But even when criminals are caught and prosecuted, this does not mean creditors automatically receive their money; they have to take action separately.
The bill before us now includes a new phoenixing offence that will catch directors who make creditor-defeating dispositions, defined as the transfer of assets from a company when the company was insolvent, became insolvent because of the transaction within 12 months, or enters into administration within 12 months of the transaction. This will allow ASIC to make orders to recover company property in phoenixing cases. Also included in the bill are new measures preventing directors from improperly backdating their resignations. This is a little trick that a number of them use—they backdate their resignation to avoid personal liability. The bill also provide new powers for the ATO in relation to GST liabilities in tax refunds, which will improve their ability to pursue tax cheats who seek to defeat the ATO through the use of illegal phoenixing.
Labor welcomes these measures, but we do believe that the government can and must go further. Professor Helen Anderson of Melbourne Law School is Australia's foremost expert on phoenixing. She stated that this bill will not solve the phoenixing problem. It's worth noting Professor Anderson's comment, in her submission to the exposure draft, that part of the problem with cracking down on phoenixing is the lack of enforcement by ASIC of existing provisions.
Labor will be moving amendments to strengthen this bill, and we urge the government and the crossbench to support them. We are going to move an amendment to require a statutory review to be conducted. This approach is supported by stakeholders and will provide better evidence for any future reforms to phoenixing law and additional support for ASIC's enforcement processes. We are also going to move detailed amendments to implement director identification numbers, DINs. Implementation of DINs would require company directors to be registered with a unique identification number on a government registry following an identification check.
They would make it easier to track directors who regularly engage in phoenixing activities, because, right now, it's far too easy to register as a director. You don't need 100 points of identification. In fact, it's easier to register a company than it is to open a bank account. Given the lax system of identifying directors, it's also easy to register someone else as a director without their knowledge or someone who has died, or a fake name or even your family pet. On top of this, there are real cases of peoples' names being used by criminals for directorships without their consent, and the consequences for those victims have often been disastrous.
Labor made a commitment to implement DINs in the lead-up to the last federal election. This measure should be easy for the government to support given they previously moved legislation to implement DINs legislation, which has now lapsed. The government's commitment to DINs was made as far back as the 2018-19 budget—that's 21 months ago. And what have we seen them doing in between? They've been attacking unions and the people who represent these workers—unions that often go in to represent workers when a company has been illegally phoenixed, in fact.
We've had numerous hours of the government taking every possible opportunity they have to attack the unions that support the workers who are going to lose their entitlements, but they can't have done this in the last 21 months. For a third-term government, you would think by now they would know what they were doing and would be able to get a bit better organised. So we're giving the government a belated opportunity to finally deliver on this commitment. If they're true to their promise, they will greet that opportunity with open arms.
The implementation of DINs has the support of several stakeholders, including the Australian Council of Trade Unions, the Australian Institute of Company Directors, the Australian Chamber of Commerce and Industry, the Small Business Ombudsman and many others. Professor Anderson said in her submission to the exposure draft of the bill:
A properly implemented director identification number that makes it clear to the would-be director that ASIC and the ATO can see their present and previous corporate dealings is vital.
I'll conclude my contribution to this bill by making some further observations about the impact of phoenixing on workers. The ACTU, in their exposure draft submission, noted that the Fair Entitlements Guarantee is a limited scheme. It does not cover all entitlements and it still leaves workers out of pocket. One of the common entitlements not paid by directors who engage in phoenixing is a superannuation guarantee, which is not covered by the FEG and, in many cases, has not been paid over the course of the workers' employment. Who loses when the employer hasn't paid the superannuation? It's the workers, again. It's the workers who rely on the unions, once again, to go to bat for them to get their entitlements. Unfortunately, the ATO has a poor record of recovering these entitlements as well, and more needs to be done to crack down on superannuation theft.
The FEG is a welcome measure to protect employees' entitlements. It was only ever meant to cover entitlements in the event of genuine corporate failure. The rapid growth in the funds paid out under the FEG indicates that some companies are deliberately restructuring their arrangements to avoid paying employee entitlements and relying on taxpayers, through the FEG, to pick up the tab. Effective measures to combat phoenixing will not only reduce the burden on taxpayers through the FEG but also ensure that more workers are able to receive 100 per cent of their entitlements, which is how it should be.
For the sake of workers, taxpayers and other creditors who are unfairly impacted by the crime of phoenixing, Labor does support this bill. I urge the government to go even further in combatting phoenixing by accepting our straightforward and sensible amendments.
Firstly, I would like to thank those senators who have contributed to the debate this morning. I think for the most part it's been very constructive and supportive of the government's position. This bill, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, amends the Corporations Act 2001, the A New Tax System (Goods and Services Tax) Act 1999 and the Taxation Administration Act 1953 to address illegal phoenixing activity.
Illegal phoenixing has been a problem for successive governments over many decades. Illegal phoenix activity hurts all Australians, including small businesses and individual contractors and suppliers that are left unpaid and out of pocket; customers who get scammed by not receiving their paid goods and services; and employees who haven't been paid their entitlements. Ultimately, all Australian taxpayers are the ones who bear the burden of unrecovered tax debts left behind by phoenix 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 in or facilitate this illegal activity. There has been broad consultation with stakeholders on the policy and legislation. There is a parliamentary amendment put forward by the opposition that seeks a review of the operations of schedules 1, 3 and 4 of the bill five years after the act receives royal assent. The government, I should flag to the chamber, has agreed to this review after a five-year period. Five years, we believe, is an appropriate period for insolvency and tax law reform and should ensure there is sufficient data to support the review, so we will be supporting that amendment.
This bill was previously considered by the Senate Economics Legislation Committee, which recommended that the bill be passed. The Morrison government is committed to tackling illegal phoenixing activity to protect honest and hardworking Australians and small businesses, employees and taxpayers. I commend the bill to the Senate.
Question agreed to.
Bill read a second time.