‘Easy money’: regulators lax on a scam that costs the economy $5b a year

AFR Weekend can reveal that a liquidator captured on wiretaps in the $105 million Plutus tax fraud and sanctioned for three years because of serious and repeated failures to investigate conduct in liquidations has recently been appointed head of insolvency operations at a major firm.

Meanwhile, the Australian Taxation Office has opted not to fund liquidator investigations into what its own agents suspect was a $180 million tax fraud over 15 years involving major construction contractor Dalma Formwork – potentially the biggest corporate fraud in the country’s history.

Michael Murray, a research fellow with the University of Sydney who has co-written books on insolvency law, says a “light touch on scrutiny and regulation” of phoenixing appears to have contributed to the problem.

“At the moment, it seems to me if you want to phoenix, you can do it undercover. You might get caught out but it’s likely you won’t.”

University of Sydney corporate law professor Jason Harris is a strong critic of the Australian Securities and Investment Commission’s lack of enforcement of phoenixing laws and says its actions in cracking down on individual perpetrators have been “nowhere near enough”.

“Each year, they only seem to run a small handful of cases – I mean four or five cases a year,” he says. “It’s just a drop in the ocean each year because there are thousands and thousands of companies that are doing this.”

According to the ATO’s latest assessment from last year, the economic impact of illegal phoenix activity is $4.89 billion a year. That included an annual cost of $3.3 billion to unpaid creditors and $1.5 billion to the government.

In the 10 years since the Commonwealth set up its multi-agency phoenix taskforce to tackle the problem, the ATO says it has received more than 17,000 tip-offs about suspected phoenix activity.

Soft deterrence

Yet, only 27 criminal cases involving such activity have been successfully prosecuted. That’s an average of just two to three a year.

Most of those were from the $105 million Plutus Payroll tax fraud in 2014-17 and the $10 million George Alex labour-hire tax fraud from 2018-20 – the latter scam started soon after the arrests in the former, suggesting how soft deterrence is in this area.

The veteran liquidator tells AFR Weekend he believes regulators “want the easy pickings” and some of the large sophisticated frauds are just too hard to prove and likely to face strong resistance.

The typical phoenix scam works like this: fraudsters pay their PAYG taxes and wages to a supposedly separate labour-hire firm, manned by a dummy director. That firm siphons off and pockets the tax for a year or two and stalls the ATO when it comes chasing. The firm then appoints a friendly liquidator who closes down the company because no creditors will fund an investigation. Meanwhile, another labour-hire firm has been set up.

“It seems like easy money, right?” Harris says on the preponderance of the scams.

“Money for tax, and then you just don’t pay the tax, and then when the ATO finally comes around to chasing you, delay, delay, delay. And then liquidation. Make sure there’s no money, no records, pay off a liquidator five or 10 grand. Rinse, repeat.”

Liquidators say fraudsters have also found ways to complicate traditional phoenix laws that prevent businesses from offloading assets to a new company for little or no value.

“What they do is refer it [the assets] off to a sleazy or friendly valuer and use the low market value – and then they just cut a cheque and send an invoice,” the liquidator says.

“The valuer only values the plant and equipment – they don’t know the goodwill of the business, the client contracts, the customers. They strip the goodwill out. Then the owners transfer their customers to the new company for nothing.”

Asked how successful it is in fighting phoenixing, an ATO spokesman says it has completed 13,000 compliance cases over the past decade, raising $2.5 billion in liabilities and returning $1.1 billion in cash.

That sounds impressive, but the cash recovery is just 7 per cent of the $15 billion the ATO estimates governments have lost from phoenixing since 2014.

More than 100 directors were also disqualified from managing companies, 27 in the last year alone.

An ASIC spokesman says director disqualification is “a key tool used in helping combat illegal phoenixing”.

However, Harris notes that banning directors will not combat sophisticated phoenixing, which relies on straw directors, often drawn from visa workers or the unemployed.

“My impression of that is, it’s padding their statistics for Senate estimates,” he says.

The problem may be even bigger than the usual statistics around insolvencies suggest, Harris adds.

From 2016 to 2021, ASIC revealed that it had about 50,000 default company deregistrations a year, which in 2020-21 was 13 times the number of liquidations at 3941. A deregistration occurs when ASIC strikes off a business for failing to respond or pay fees.

“I think the problems that we’re seeing with phoenixing and illegal activities that are caught through liquidation, that’s the tip of the iceberg. Because no one’s looking at the deregistered companies,” Harris says.

“So if you’re a hardcore criminal, there are various ways to quietly shuffle the companies off this earth and no one ever looks at it.”

Harris says ASIC and the ATO need to put more resources into targeting the lawyers, accountants and insolvency advisers – “because that’s the network that supports this phoenix activity on an industry-wide scale”.

“You start throwing accountants and lawyers in prison, the message will soon get out there. They can’t get away with it.”

Meanwhile, more reviews are under way. The Productivity Commission’s proposed competition reforms at the end of last year included preventing phoenixing in the building sector.

Last week, the Department of Employment and Workplace Relations started reviewing phoenixing powers to ensure workers were not left without entitlements, and it noted the problem of “friendly liquidators”.

Treasury, which is expected to announce new changes on phoenixing as the election approaches, will soon start reviewing illegal phoenixing laws that were introduced in 2020 and which have so far not been used.

Murray says the answer is not more laws or regulation.

“Politicians love to say there’s a phoenixing problem [so] let’s pass a law and we’ll fix it. But it’s been quite a few years and nothing’s happened [with the new powers],” he says.

Recently, Harris, who is also deputy co-chairman of the Law Council of NSW’s insolvency committee, which advises Treasury, has been advocating for the government to set up a specialist insolvency regulator.

“If we had a dedicated insolvency regulator and enforcement agency like they do in many other countries, then maybe we could have a bit more accountability for what the regulators are doing,” he says.

So far the idea hasn’t got traction. “There’s no political appetite for it.