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

The Australian Taxation Office admitted it was responsible for 2 per cent of bankruptcies and 7 per cent of all company wind-ups in the last financial year.

Most of the time the ATO will come to some kind of arrangement with a debtor and will often waive interest and penalties – but rarely will they reduce the primary debt.

The ATO admits it does take a hard line on some firms but these firms would have a long history of not paying their tax or a history of broken promises with the ATO in respect of payment of tax.

The tax office doesn’t want to wind up viable companies, but must take action where there is evidence of a business trading while insolvent,” a spokesman from the ATO said.

The tax office does not want the GIC or temporary cash flow problems to be the difference between a company surviving and being able to meet its tax and superannuation obligations or becoming insolvent and enterning into liquidation.

Businesses in trouble and wishing to negotiate a GIC free installment arrangement for a maximum of 12 months should contact the ATO on 13 11 42. Applications for the GIC free payment arrangement will be accepted from now till 30 June 2010.

The tax office is also offering small business with temporary cash flow problems the chance to defer the payment date of their activity statement liability.

Businesses that pay quarterly and annually may be granted a deferral of up to 2 months and those that pay monthly will be eligible for up to 1 month deferral. Activity statements will of course have to be lodged on time however no interest will apply for the period of the deferral.