Bills: Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 - Second Reading
Senator Patrick: 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.