Phoenixing costs Australia’s economy $5 billion, finds PwC report

26 July 2018 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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Chinese investment into Australia plunges to eight-year low

09 April 2019 Consultancy.com.au

Chinese investment into Australia plunged to US$6.2 billion last year according to the latest KPMG analysis, down by more than 35 percent to an eight-year low. 

A study from global professional services firm KPMG in conjunction with The University of Sydney has found that Chinese investment into Australia dropped by 36.3 percent in 2018, despite Chinese outbound direct investment growing by 4.2 percent globally to nearly US$130 billion. Taking in mergers and acquisitions, joint ventures, and green-field projects, Chinese investment into Australia totaled US$6.2 billion in 2018, down from US$10 billion the previous year.

As part of an ongoing collaboration between the Big Four firm and Sydney Uni, the latest release in the ‘Demystifying Chinese Investment in Australia’ report series (now into its fifteenth edition) points to Chinese domestic policy changes for the decline, with the local downward rate of investment now coming into line with trends seen in the US and Canada, which last year recorded respective Chinese inbound investment drops of 83 percent and 47 percent (in USD terms).Value of Chinese ODI into US, Europe and Australia 2012-2018

Designed to reduce its international exposure, the policy measures being implemented in China since early 2017 require overseas investments by Chinese firms to be non-speculative, only undertaken after fully considering major potential risks, and consistent with the company’s strategy and the country’s socio‑economic development goals – with certain categories of investment encouraged and others prohibited or restricted.

With 80 percent of Chinese executives stating that it was more difficult to get capital out of China in 2018 compared with 65 percent the year prior, the result is the second-lowest Chinese inbound investment in Australia since the mining & gas driven investment peak of 2008, with over US$16 billion coming into the country. Outside of the US$3.9 billion figure in 2010, the investment sum hasn’t dipped below US$8 billion in a decade.Chinese investment into Australia - 2007 to 2018

Yet, despite the domestic policy measures and downturn in inbound investment, Australia is still seen as a relatively safe investment destination according to a cross-sector survey of Chinese executives, with an improving political climate (those cautious due to the local political debate dropped from 70 percent in 2017 to 59 percent last year) and slight increase in the sense of being welcomed – up three points to 38 percent, although those feeling ‘unwelcome’ also rose by four points to 19 percent.

“Whilst Chinese investors confirm they remain positive about many aspects of the Australian market and its prospects compared with many other countries, there is an increasing concern around transparency of regulations, high costs and their continued perception of being unwelcome as reflected by negative Australian media coverage.” the report states.  “We need to be aware of the very real impact that poorly received, politically motivated public discourse and unbalanced media coverage can have on the future level of Chinese capital entering Australia.”2018 Chinese investment into Australia by sector

As an investment breakdown, private Chinese companies accounted for 87 percent of the deal value in 2018 and over 92 percent of deal volume, with state-owned entities contributing only 13 percent of value and 8 percent of the volume – which in total, dropped by 28 percent from 102 transactions in 2017 to 74 last year. As per those deals, over 40 percent of the investment total was made in the Australian healthcare sector, a more than 110 percent increase on the prior year.

According to the analysts, Chinese investors are primarily interested in scalable medical services and healthcare products which can be scaled in their home market, and the Australian healthcare sector has gained increased interest due in part to the ‘Australia package’ – ‘the combination of transferable management know‑how, high‑level care service experience, state of the art technology, the ‘clean, green and healthy’ image of Australian products.”

Meanwhile, new mining investment has dropped sharply – down 90 percent from a spike last year for just 5.6 percent of the total – opening the door for commercial real estate (predominantly mixed-use development and office stock according to figures provided by Knight Frank) to claim the second highest levels of Chinese investment at ~37 percent (albeit down 31 percent on 2017 levels). The remaining deal value was mostly in oil & gas (8.8 percent, up 295 percent) and renewable energy (4.8 percent, up 217 percent) sectors.2018 Chinese investment into Australia by geography

Perhaps of further note, at least in terms of demystifying Chinese-Australian investment, ‘Northern Australia’ attracted at most just 8 percent of total investment, with Queensland accounting for only 5 percent, Western Australia 3 percent, and zero deals made in the Northern Territory. Here, the bulk of the inbound investment was made in New South Wales (56 percent) and Victoria (27 percent) with South Australia (8 percent) claiming the majority of the remainder.

“While this annual result brings Chinese ODI in Australia back to the second lowest level since 2008, there is no reason why Australia can’t return to higher levels seen historically,” the report concludes. “2018 need not define a trend, but it is a period to reflect upon. There are a great many opportunities for Chinese companies to contribute towards the development and internationalisation of Australian industries and supply chains in the coming years and there is much that can be done to improve the perception of the Australian market to Chinese investors and vice versa.”