Bills: Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 - In Committee

5 February 2020

In Committee

Bill—by leave—taken as a whole.

Senator Patrick: I have a question for the minister in relation to the main bill. It relates to the tax liability—that is, GST liability that is assigned to a director. I understand the reasoning behind that, and Centre Alliance are supportive of that. However, as I said in my contribution to the second reading debate, it's always been the intention of the corporate veil not to act as a barrier to dealing with misconduct or breach of regulations. The intent of that was to apply to people who start up a company operating in good faith and who come across some misfortune that was unintended and end up in a situation where they bear the liability. That can be a disincentive to investment. In that context I'd like to ask a question, and perhaps give an example. I'm trying to understand how the tax office will deal with situations where you have an unintended consequence. I'll start by saying that a scenario might involve a company, 'Our Perfect Company Pty Ltd'. They are doing work with an overseas company that is providing services. The company employs three subcontractors—small businesses. They might each do $100,000 worth of work, and of course the company is waiting on a $500,000 payment to cover off on the work done by each of the three subcontractors and, obviously, some work that the company themselves have done.

 

The company has the ability to pay their own tax liabilities. As is often the case, they may be working on other projects. They have cash in the bank and can meet the liabilities, but suddenly the overseas entity indicates to them that they can't pay the bill, that they are not going to be able to pay the bill for another month or month and a half. That leaves the director in a position where he has to go to the subcontractors. I have personally been in this sort of situation where a subcontractor is new in business and doesn't have cash reserves and is struggling. So the director is now faced with a choice—'Do I use the reserves of cash to pay my GST liabilities or my tax liabilities, or do I pay my subcontractor with the hope that I eventually get paid from oversees, knowing full well that if I don't pay the subcontractor they'll go under and I like the subcontractor; they do good work?' That's the sort of situation that you can confront. I personally confronted that exact situation in relation to business. I just want to understand how the tax office will deal with those sorts of circumstances. What measures are in place to make sure that the tax office is going to be reasonable in those sorts of circumstances?

Senator Hume - Assistant Minister for Superannuation, Financial Services and Financial Technology): The aim of this bill is certainly not to have a negative impact on honest directors that are potentially affected, whether it be by illegal phoenixing by other organisations that owe them money or by late payment, which affects cash flows. We are very aware of this, though. The government understand the effects of illegal phoenixing generally are very widespread and that's why we are committed to stopping it.

There are certainly some circumstances where a director who is doing the right thing is unfairly impacted by the actions of other companies and whose business may well be left unable to pay what it owes to creditors, and that includes the ATO if they themselves have not been paid and might be left out of pocket. That's not a new problem for all businesses, particularly small businesses. In circumstances where a business is clearly doing the right thing and cannot meet its tax obligations, the ATO will of course work with those businesses to set up a payment plan and to find a way to repay the debts in a timely manner.

Senator Patrick: That's a very helpful answer. I am just wondering: will there be formal procedures put in place to recognise that sort of circumstance and guide tax officials when confronted with those circumstances?

Senator Hume - Assistant Minister for Superannuation, Financial Services and Financial Technology: Those processes are already in place now, so they don't necessarily need to be formalised as part of this particular bill.

Senator Patrick: I'd be grateful if you wouldn't mind perhaps tabling those processes that are already in place at a later stage on notice.

Senator Hume - Assistant Minister for Superannuation, Financial Services and Financial Technology: They are just general rules and there should be publicly available information on how to go about that, so that's not part of this bill. I think that simply going to the ATO website would probably be a good start as to how you go about setting up a payment plan.

Senator Patrick: I've been to the ATO website. It is a massive site and can lead you down all sorts of pathways. If you could direct me or someone in my office to the particular area, I'd be most grateful.

Senator Hume - Assistant Minister for Superannuation, Financial Services and Financial Technology: We can certainly take that on notice. I can't direct you to exactly the right spot right now, but that is something we can certainly do.

Senator McAllister: by leave—I move opposition amendments (1) and (2) on sheet 8862 together:

(1) Clause 2, page 2 (table item 1), omit "Sections 1 to 3", substitute "Sections 1 to 4".

(2) Page 2 (after line 11), after clause 3, add:

4 Review of operation of amendments

(1) The Minister must cause an independent review to be conducted of the operation of the amendments made by Schedules 1, 3 and 4 to this Act.

(2) The review must start as soon as practicable after the end of 5 years after this Act receives the Royal Assent.

(3) The persons who conduct the review must give the Minister a written report of the review.

(4) The Minister must cause a copy of the report to be tabled in each House of the Parliament within 15 sitting days of that House after the report is given to the Minister.

I note that the minister has indicated that the government intends to support those amendments. We appreciate the support. Essentially, as I flagged in my speech in the second reading debate, these amendments seek to ensure that these laws are reviewed after five years to allow us to assess whether or not they are working as intended.

Question agreed to.

Senator Faruqi: by leave—I move Greens amendments on sheet 8840 together:

(1) Clause 2, page 2 (table item 3), omit "and 4", substitute ", 4 and 5".

(2) Page 40 (after line 12), at the end of the Bill, add:

Schedule 5—Other provisions relating to directors

Corporations Act 2001

1 After section 184

Insert:

184A Duties in relation to building products

(1) A director or other officer of a corporation commits an offence if:

(a) the director or officer has a duty under this section; and

(b) the director or officer fails to comply with the duty.

(2) A director or officer of a corporation that designs, manufactures, imports, supplies or installs external wall cladding products has a duty under this section to take all reasonable steps:

(a) to acquire, and keep up to date, knowledge of matters about the safe use of external wall cladding products; and

(b) to gain an understanding of:

   (i) the nature of the corporation's business activities relating to external wall cladding products; and

   (ii) safety risks and non‑compliance risks associated with external wall cladding products; and

(c) to ensure the corporation has, and uses, appropriate resources to remove or minimise the risks mentioned in paragraph (b) (ii); and

(d) to ensure the corporation has, and implements, appropriate processes:

   (i) to remove or minimise the risks mentioned in paragraph (b) (ii); and

   (ii) for receiving, considering, and responding in a timely way to, information about the risks mentioned in paragraph (b) (ii) and any incidents arising from the risks; and

(e) to verify the resources and processes mentioned in paragraphs (c) and (d) are being provided, used and implemented.

2 Section 185 (heading)

Omit "184", substitute "184A".

3 Section 185

Omit "184", substitute "184A".

4 Section 186 (heading)

Omit "184", substitute "184A".

5 Section 186

Omit "184", substitute "184A".

6 Subsection 200E(4)

Omit "or 184", substitute ", 184 or 184A".

7 After section206EAB

Insert:

206EAC Court power of disqualification—involvement in certain creditor ‑defeating dispositions

(1) On application by ASIC, the Court may disqualify a person from managing corporations for up to 20 years if:

(a) the person is a director of a company; and

(b) there is:

   (i) a creditor‑defeating disposition of property of the company; or

   (ii) a disposition of property (whether before or after the commencement of this subsection) of the company that would have been a creditor‑defeating disposition if the amendments made by the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019 had been in force at the time the disposition was made; and

(c) the company, at any time (whether before or after the commencement of this subsection):

   (i) designs, imports, supplies or installs an external wall cladding product for a particular use; and

   (ii) the external wall cladding product is a non‑conforming building product for that use; and

(d) the Court is satisfied that the disqualification is justified.

(2) For the purposes of subparagraph (1) (c) (ii), a building product is a non‑conforming building product for a particular use if one or more of the following apply:

(a) the product is not safe for the use;

(b) the product does not comply with the National Construction Code (as in force or existing from time to time);

(c) the product does not perform, or is not capable of performing, for the use to the standard it is represented to perform by the company.

(3) In determining whether the disqualification is justified, the Court may have regard to:

(a) the person's conduct in relation to the management, business or property of any corporation; and

(b) any other matters that the Court considers appropriate.

8 Sec tions 230 and 260E

Omit "and 184", substitute ", 184 and 184A".

9 Subsections 420A(2) and 442CB(3)

Omit "or 184", substitute ", 184 or 184A".

10 Paragraph 579(2 ) ( a)

Omit "or 184", substitute ", 184 or 184A".

11 Paragraph 1274AA(1 ) ( a)

After "206EAB,", insert "206EAC,".

12 After paragraph 1274AA(2 ) ( aba)

Insert:

(abc) every court order referred to in section 206EAC; and

13 Schedule 3 to the Act (after the table item dealing with subsection 184(3))

Insert:

Subsection 184A(1)

15 years imprisonment

   

As already indicated by my colleague Senator Whish-Wilson, the Greens do support this bill, but we also realise that what this bill does not do is specifically crack down, and crack down hard enough, on building companies who are phoenixing to avoid paying their debts and avoid taking responsibility. Builders who declare bankruptcy to avoid sanctions for their shoddy works are constantly resurfacing as new businesses in the building industry. We know that phoenixing is rife in the building industry, and a huge part of that could actually be linked to the cladding crisis.

Everyone in this chamber is well aware of the fire in the Lacrosse building in Melbourne, which was directly linked to the external building's flammable cladding. The Melbourne Metropolitan Fire Brigade concluded in their investigation of the Lacrosse fire that the rapid vertical spread of the fire was directly associated with the external cladding. This is a terrible issue on its own, and it's actually made much worse and is further exacerbated by the issue of phoenixing in some of the cases.

One of the most egregious examples of phoenixing being a huge issue in the building industry is happening in Victoria with the Hickory Group. Twenty-five properties built by this group have been identified by the state-wide cladding audit as 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, Mr Michael Argyrou has been a director and/or secretary of 40 companies which are now deregistered. Two more companies of which he was director are in administration and three are in the process of being struck off after the company sought voluntary deregistration. Mr George Argyrou, the company's joint managing director, is a former director and/or secretary of 27 deregistered companies.

These amendments effectively do two things. Firstly, they create a duty for directors and officers of corporations that design, manufacture, import, supply or install external cladding products to take every single reasonable step that they can to keep up to date with cladding products, to understand what the safety risks are, and to take appropriate actions and steps to minimise and remove these risks. This will help stop the dodgy directors of these dodgy companies. Secondly, and this is the most powerful part of these amendments, these amendments give the courts the power to disqualify a person from managing corporations for up to 20 years if (1) they were a director; (2) they engage or engaged in phoenix activity, and that uses the current framework of the act as it exists; and (3) the company at any time designed, imported, supplied or installed wall cladding products that were nonconforming according to the National Construction Code. Lastly, these amendments require that the court is satisfied that the disqualification is justified with regard to the person's conduct and any other matters the court considers appropriate.

I'll say in conclusion that it is really important that companies who have installed flammable, non-compliant cladding must be brought to justice. These dodgy companies cannot be allowed to get away, and the courts as well as ASIC should pursue them relentlessly. Of course, this issue of cladding, which has hurt so many people, needs to be addressed by a whole-of-government response to this crisis. I knew that New South Wales and Queensland have already called on the federal government to take more responsibility and to act on this issue. But I think today we have an opportunity to make a real change on this issue. This is exactly what these amendments do. I urge my colleagues to support these amendments.

Senator Patrick: I rise in support of the amendments that have been moved by the Greens. Senator Faruqi mentioned the Grenfell fire and the fire in Melbourne. It's a terrible situation that we've got. Around the country, we've got a number of buildings that are clad with flammable material. 'Wrapped in petrol', I think, is the phrase that is often used because of how flammable this cladding can be. When the Senate looked at this through the non-conforming building products inquiry, chaired by then Senator Ketter, which did a fantastic job of examining this, one thing was really clear in relation to cladding, and that was that there was a lack of responsibility. Whether it was the importer falsely making declarations about the nature of the cladding, whether it was the builder who had selected a particular type of cladding because it was a couple of dollars per square metre cheaper or whether it was the building surveyor who simply wasn't in a position to work out post facto whether the cladding was flammable or non-flammable, there was finger pointing: 'Anyone but me.' What this amendment does is assign responsibility to the people who are in direct control of their activities and are in a position where they can stop this from occurring. So it's great. It's not about government regulators who might be distant. It's not about the person who's acquired the building having to do their own due research. It places responsibility right where the control is, and as such it's a good measure. I thank the Greens for introducing these amendments to the bill, and Centre Alliance will be supporting them.

Senator Hume - Assistant Minister for Superannuation, Financial Services and Financial Technology: The government definitely agrees that non-conforming building products are a very important issue. It was an issue that was well examined by the Senate Economics References Committee over the last couple of years. This particular bill was designed to capture directors who illegally phoenix a company, and that includes property developers who strip assets after building shonky buildings. However, phoenixing is certainly not limited to property developers, and as such this bill is intentionally industry agnostic. So we will not be supporting the amendments proposed by Senator Faruqi. I do want to emphasise that the safety and security of fellow Australian will always be a priority of the Morrison government. However, issues related to combustible cladding are more appropriately dealt with through the National Construction Code, implementation and regulation of which remains a matter for states and territories. The National Construction Code is the appropriate place to deal with these matters, not the illegal phoenixing legislation.

A significant achievement for Australia's building and construction industry has been securing agreement from the states and territories to work together on a national framework to restore confidence in the quality and safety of Australia's built environment. In fact, the Building Ministers Forum, the BMF, which is chaired by Karen Andrews, the Minister for Industry, Science and Technology, has actually tasked the Australian Building Codes Board, the ABCB, with delivering a national framework that ensures a nationally consistent approach to implementing the Building confidence report recommendations. Significant progress has already been made by the ABCB implementation team in delivering on that national approach. In fact, building ministers received an update from the ABCB on this work at the last Building Ministers Forum in December 2019, just a couple of months ago, and a key milestone will be the release of an amendment to the National Construction Code next month, which will take steps to address several recommendations of the Building confidence report. That amendment will include a far more robust approach to documentation to strengthen design, consistency and quality. Indeed, this is intended to address the concerns that you have about the safety of high-rise buildings through greater safeguards for the design, construction and certification of these buildings. The government believes that this is a really terrific step forward, and it has been heralded by industry and by the community as the only way to improve compliance and trust in Australia's building and construction sector.

Senator McAllister: Labor of course supports action on dodgy builders and improvements to building safety and quality. A number of contributions so far have referenced the committee process. It ran over two parliaments, it was led and driven by Labor senators, it took 164 submissions, it had 10 hearings all over the country and it was a very important piece of policy work achieved by the Senate that illuminated the very complex set of changes that needed to take place to bring accountability to this sector.

Unfortunately, as Senator Faruqi will know, in our home state of New South Wales there are still very substantial problems. There are a range of current issues where investors and owners associated with very substantial infrastructure projects, particularly the towers, have been left in a very uncertain situation, and this remains a very serious and urgent policy problem for governments, state and federal, to tackle.

Our concern with these Greens amendments is that the provisions to add new, specific directors' duties in relation to building materials seem unlikely to be effective in tackling this problem. As the Shergold and Weir report points out and as the Senate inquiry pointed out, it is a much more complex problem than this. Directors are in fact already required to act in good faith, they can already be found personally liable for breaches of the law in a range of circumstances and it's our view that these new specific provisions around building materials are not what will make directors behave any better. As the contributions to the Senate inquiry on this legislation made clear, what is most needed is focused regulatory activity by ASIC, properly resourced to do its task.

So we won't be supporting the amendments, but it remains the case that we consider this a priority and we are happy to work closely with the Greens or any other interested parties in this place to progress legislation that will make Australian buildings safer, more fireproof and simply better.

The CHAIR: The question is that Greens amendments (1) and (2) on sheet 8840, as moved by Senator Faruqi, be agreed to.

Division: NOES 46 (35 majority) AYES 11 PAIRS 0

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