ATO plans Security Bonds to beat phoenix activity

The ATO is seeking amendments to its powers with the introduction of the Draft Tax Laws Amendment Bill 2010 that will give the ATO discretionary power to demand security deposits from businesses as part of securing likely or expected tax obligations.

The draft legislation is an attempt to stop companies and directors engaging in phoenix activity.

The ATO estimates that the level of suspected phoenix cases may be in the order of $600 million and that this is an unacceptable risk to the governments revenue.

A phoenix transaction may be understood if one examines a typical situation.

A company called XYZ Pty Ltd has assets of $20,000 against liabilities of $200,000. It is clearly insolvent.The director, in survival mode has no funds but want to save his income source. Accordingly, he transfers all the assets of the company together with phone numbers staff etc into a new entity call XYZ (Aust) Pty Ltd.He transfers the assets for no consideration or for undervalue. By doing so, he leaves creditors with the shell of the old company but with all assets removed beyond their reach.

The ATO bond seeks to put a real price on such illegal activity for itself and creditors generally in that directors will lose more than their $1 share capital.

Section 255-100 of the proposed Bill says:

1.   The Commissioner may require you to give security for the due payment of an existing or future tax related liability of yours if:

a.    the Commissioner has reason to believe that:

i.    you are establishing or carrying on an enterprise in Australia; and

ii.   you intend to carry on that enterprise for a limited time only; or

b.   the Commissioner believes that the requirement is otherwise appropriate, having regard to all relevant circumstances.

The Bill gives the ATO power, at any time, to require such security deposits as the Commissioner considers appropriate.

It is expected that the ATO will use this power in high risk industries known to be at risk for phoenix transactions and against directors with a history of failed companies with large tax debts