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Labor pledges crackdown on dodgy company directors

NewsMember for Fraser, Andrew Leigh outside his office which is 600m outside the new Fraser border. He will now need to move to a new office inside the new Fraser electorate. 7 July 2016Photo by Rohan ThomsonThe Canberra TimesPolitical Insider: Sign up for our newsletter
Nanjing Night Net

All Australian company directors would be assigned special ID numbers under a new Labor policy designed to prevent them deliberately tanking their companies to avoid paying workers, creditors and the Tax Office.

The federal opposition is also promising tougher penalties for dodgy directors and stronger protections for employee entitlements under its plan for a crackdown on what is known as “phoenix activity”.

???The scourge of corporate Australia, phoenix activity costs the economy billions of dollars a year, but little has been done to stamp it out. It occurs when a company collapses with a mountain of debts and then rises from the ashes – like the mythical bird – with the same assets and customers to avoid paying bills.

Under Labor’s new policy – to be announced by frontbenchers Brendan O’Connor, Andrew Leigh and Katy Gallagher on Wednesday – all company directors would be forced to undergo a 100-point identity check.

Under current rules, it is easier to become a company director than it is to open a bank account. Applicants are not required to prove their identity or provide a record of their past corporate history, allowing unscrupulous directors to register a number of companies using different versions of their name.

Under the Labor plan, existing and prospective directors – about 2.5 million of them – would be assigned a director identification number via the Australian Securities and Investment Commission for a $50 fee.

The unique ID number would allow tracking of directors that have been involved in multiple failed companies and expose fictitious directors, considered the bane of credit rating agencies and the Tax Office.

The number would enable ASIC to build a database of directors’ corporate histories, helping it identify repeat offenders and candidates for disqualification from managing corporations. ???Labor will argue the ID number initiative will not add to red tape and could help cut down on paperwork by helping to pre-populate online forms.

Phoenix activity can have devastating impacts on small businesses, particularly suppliers and subcontractors, and employees. The issue has been particularly prevalent in the building industry but occurs across the economy.

Labor believes the more entrenched the activity becomes the worse it will get and the harder it will become to clamp down on.

ASIC recently said 11,494 companies had been identified as potentially engaging in illegal phoenix activity. The Tax Office told a recent Senate inquiry that the number of “potential” businesses illegitimately building their wealth through “fraudulent phoenix behaviours” was 19,800.

It estimates it is owed about $1.8 billion in debt from these entities.

The scandal that has rocked the Australian Tax Office has also been linked to phoenix activity, with reports that one of the accused co-conspirators of the $165 million fraud previously engaged in the activity.

The opposition says the current penalty regime is insufficient. It is proposing stiffer punishments for breaches of directors’ duties, managing companies while disqualified and refusing to open books to administrators.

The Productivity Commission has estimated phoenix activity costs the economy up to $3.2 billion a year, and has backed the idea of a unique ID number for directors. Experts and regulators have also called for more stringent ID standards.

Dr Leigh has described phoenix activity as “un-Australian”.

“The spread of phoenix activity throughout Australia hurts decent small businesses,” he said in February. “It hurts the people who worked for the failed company and the suppliers and subcontractors who worked with them. It also hurts honest taxpayers, who have to shell out more when some people don’t pay their fair share.”

In the last financial year, the Tax Office conducted almost 1000 audits into phoenix schemes and raided several offices.

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