Australia’s $5 billion phoenixing bill; a PwC report

26 July 2018 Authored by Consultancy.com.au

A high estimate of $5 billion is being wiped off Australia’s economy due to phoenixing, or illegally dissolving a company and then rebuilding it from the ashes according to a PwC report commissioned by the Australian Taxation Office (ATO), Fair Work Ombudsman (FWO) and the Australian Securities and Investments Commission (ASIC). 

The study, titled ‘Economic Impacts of Potential Illegal Phoenix Activity’, puts the cost of phoenixing between $2.8 billion and $5.1 billion each year based on activity between 2015-2016. The consulting firm goes further to determine the overarching costs to the Australian economy, estimating up to $3.5 billion worth of lost GDP or 0.21% of the Australian annual GDP.

Phoenixing is the act of a corporate entity intentionally liquidating the company in order to avoid costs; i.e., paying employees wages, taxation or debts to creditors. Once the company dissolves, a new legal entity will emerge from the ashes, hence the name – phoenixing. This process can leave in its wake a procession of unpaid employees, contractors, suppliers and lost superannuation and tax revenue. 

The PwC report breaks down the direct and indirect cost of phoenixing into three different categories; cost to businesses, costs to employees, and costs to government. These costs have then been spread out across a four year index to determine roughly how much phoenixing costs the country each year. 

Direct costs of Australia’s $5 billion phoenixing bill according to PwC between 2015 and 2016

The costs to business ($3.1 billion per year) are determined by a calculation which identifies the real costs to businesses by other businesses phoenixing or legitimately failing and then cross references it with the illegal component. However, for a number of reasons – including that assets may be transferred prior to insolvency – these estimates may be conservative. 

For employees this number is lower, but still the direct cost is just under the $300 million mark. The main damage done to employees throughout the ordeal of phoenixing is generally to do with employee entitlements; specifically unpaid wages, leave, payment in lieu of notice, redundancy, long service leave and superannuation. 

Governments are worse off each year than employees as a whole, with PwC estimating that $1.6 billion was wiped from government coffers. To get to this figure, the consulting firm uses the same methodology as for the costs to businesses but with the ATO as a basis for its data. In addition to these unpaid debts are the costs of phoenix monitoring and the costs of the government covering employee entitlements (wages, etc.). 

Direct costs of potentially illegal phoenix activity according to PwC

The costs associated with phoenixing go beyond the immediate costs to the aforementioned victims, but can also cause a strain on the greater economy at large. This is indeed more difficult to calculate, however PwC have included some sectors which are affected but the costs are not captured in the direct analysis. These include; employee stress, discouragement effect on labour supply, social welfare burden through increased government transfers and competition effects.

In addition, the economy-wide results also includes a number of knock-on effects which bring the number higher. GDP representing ‘lost value’ can essentially act as a tax on the victims of phoenixing, where money is spent but there is little to show for it. The additional costs of this can be between $1.7 billion and $3.2 billion. Household consumption as a measure for wellbeing can be affected due to a lack of cash flow affecting ability to access goods and services. Government revenue can also be impacted by phoenixing of between $750 million and $1.5 billion due to a less competitive economic environment or a lack of revenue due to unsold goods or services.

The Minister for Revenue and Services, Kelly O’Dwyer, said that the ATO has recently performed an audit on 340 businesses which have been reprimanded for phoenix activities. The results of the audits was the issuing of tax bills which amount to $270 million. O’Dwyer said phoenixing “hurts hardworking Australians, including the company’s employees, suppliers, customers and competing businesses.” He also said that phoenixing causes a “significant drain” on the Australian economy. 

Nominal direct costs of Australia’s $5 billion phoenixing bill according to PwC between 2012 and 2016

The government has recently set up a hotline and a phoenixing taskforce who are set to tackle this issue head on. This will be done through a joint task force – The Inter-Agency Phoenix Taskforce – comprising of 29 agency members including State and Territory Revenue Offices and appointees from the ATO, FWO and ASIC. “Successfully combating potential illegal phoenix activity in a cost-effective manner could provide a significant boost to the Australian economy,” it stated in the report. 

“Employees, creditors and stakeholders pay the price when unscrupulous individuals misuse the corporate form to strip assets from one company to another to avoid paying entitlements and liabilities,” says AICD Managing Director and CEO Angus Armour. “The practice also damages confidence in the corporate model, to the detriment of the vast majority of responsible businesses and directors,” he says.

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