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Wednesday, 20 June 2012
Page: 7192

Mr MELHAM (Banks) (10:26): I rise to support the Tax Laws Amendment (2012 Measures No. 2) Bill 2012, the Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2012 and the Pay As You Go Withholding Non-compliance Tax Bill 2012.

I want to address a couple of points that the member for Goldstein made in his contribution. The first thing I want to say to the House is: I am not opposed to retrospective legislation in certain circumstances. That has been a feature of legislative reform over the years—obviously, not in every single case, but it is warranted in a number of cases. Indeed, it is warranted sometimes in the criminal law. Indeed, when we had the war crimes legislation under the Hawke government, it produced retrospective legislation against abhorrent conduct that occurred at the time of the Second World War. That legislation was supported, and it made criminal acts that should have been criminal at the time. So you just cannot rule it out.

Today we see on the front pages of the newspapers a shyster, a solicitor, who was overcharging his clients and who, some 12 months ago in New South Wales, transferred to his wife millions of dollars worth of assets, be it his share of the family home for a dollar, or his share of a farm for a dollar. It is said that his assets can be recovered. That is what is being said in the papers. But I say to you, Madam Deputy Speaker D'Ath: if that shyster's assets cannot be recovered then the New South Wales government should introduce legislation and it should be retrospective legislation that enables it to recover his assets, because he was under investigation and during the period of that investigation has transferred his assets, for a dollar, in some instances, where the value was much more. What are we supposed to do as legislators—do what the coalition does in a number of instances: be like moo cows, watching the passing traffic? No, in my opinion, you come in and you legislate, and a retrospective feature is warranted—not in all circumstances but in some circumstances.

The reason I rise to support this particular legislation has to do with features of it in terms of phoenix activity. I go to the explanatory memorandum, which says:

Schedule 1 to this Bill strengthens directors’ obligations to cause their company to comply with its existing Pay As You Go (PAYG) withholding and superannuation guarantee requirements. These amendments reduce the scope for companies to engage in fraudulent phoenix activity or escape liabilities and payments of employee entitlements by:

extending the director penalty regime to make directors personally liable for their company’s unpaid superannuation guarantee amounts;

ensuring that directors cannot discharge their director penalties by placing their company into administration or liquidation when PAYG withholding or superannuation guarantee remains unpaid and unreported three months after the due date; and

in some instances, making directors and their associates liable to PAYG withholding non-compliance tax where the company has failed to pay amounts withheld to the Commissioner of Taxation (Commissioner).

The explanatory memorandum goes on to summarise regulation impact statements and explain other aspects of the bills. In particular, it says at paragraph 1.7:

The director penalty regime makes directors of companies that fail to comply with their obligation to pay amounts withheld under the PAYG withholding regime to the Commissioner (or fail to pay an estimate of their PAYG withholding liability) personally liable for the amount that the company should have paid, through imposition of a penalty.

It continues in paragraph 1.11:

Phoenix activity poses a significant threat to employee entitlements, government revenue and the economy as a whole. In its most basic form, a fraudulent phoenix company is used to intentionally accumulate debts and then is placed into voluntary administration or liquidation to avoid paying those debts. The business then ‘re emerges’ as another corporate entity, controlled by the same person or group, but free of debts. However, some aspects of the director penalty regime limit its efficacy in ensuring that directors cause their companies to comply with their obligations, including in phoenix cases.

Some evidence was put before the Standing Committee on Economics on 27 October 2011 by Mr Grant Darmanin, a senior director and the Phoenix Risk Manager of the Australian Taxation Office, that is worth mentioning. On page 29 of the committee report, he says:

Our best estimate is that at any given time there are around 6,000 phoenix companies operating in Australia, and we estimate that, given that not all of them have a single director—some have two directors—somewhere between 7½ thousand and 9,000 company directors could be exposed in particular to this legislation. These are fraudulent phoenix operators; they are not just people making business decisions.

That is what he says in evidence. Then on page 31 he says:

Fraudulent phoenix operators, almost to a person, do not report, they do not lodge and they do not pay. We have to go out and identify them and quantify the liability, sometimes using forensic-style investigative or audit techniques.

I think it is important to put on the record that on page 32, Mr Darmanin says:

There are, but phoenix operators, particularly the fraudulent ones, are very adept at flying under the radar, so to speak. When they come back into the ATO's systems, they will quite often use as the director someone who is not directly related to the former group. It might be someone that they engage, pay or hire or a name they pick from the telephone book. When we profile that individual when it comes through, quite often the direct links to that former business are not obvious. I take your point, though, that if we ask them questions we may get some answers, but phoenix operators do not like telling the truth.

Then on page 33, the chair says:

Okay. So there are 6,000 to 7,000 that you know about. Do you have an estimate of how many you might not know about and how many new ones come in every year?

Mr Darmanin responded:

No, we do not. There have been various studies done over the years, not so much by the ATO but by other committees and organisations, that have made various assessments of the impact of phoenix activity on the Australian economy. The most recent one was a 2004 parliamentary joint committee inquiry into corporations and financial services. That put the impact on the Australian economy at that time—2004—as being between $1 billion and $2.4 billion per annum. That is the most recent hard data we have to work with. Since that time, all the ATO's experience is that fraudulent phoenix activity has continued to increase not decrease, despite the ATO having a targeted approach to try to address this behaviour since the late nineties.

The chair then asked:

How much is it increasing every year?

Mr Darmanin responded:

It is hard to be definitive around that. When I say 'increasing', the indicators that we look at are the number of complaints being lodged by individuals whose entitlements have not been paid and we look at those companies and find that they are involved in repeat phoenix behaviour. We have incidents of companies incurring repeat liabilities—companies who are given an income tax adjustment the first time who choose to liquidate and continue their business through a new company rather than pay those assessments, for example. We have break-outs in different parts of our business, as I talked about before. A lot of phoenix activity in previous years used to be at the lower end of the SME market; now it is across the whole of the SME market. It is active in the micromarket as well. Originally, it used to be PAYE and prescribed payments, when we had that system; now it is in the superannuation, GST and income tax.

The member for Goldstein talks about sovereign risk. What I see here is risk to the ordinary taxpayer—to the ordinary hardworking individual—from shonks. The parliament should go after the shonks and set a legislative framework, even if it requires retrospectivity, that puts these people on notice that they will be personally liable and that we will come after them if they engage in this sort of behaviour. And we should not apologise for it. Recently we saw a situation where the High Court came down in terms of directors' liabilities and duties to do with a particular company dealing with asbestos. I welcome that unanimous decision of the High Court, because what it says is, 'If you want to be a director, don't bother just picking up your director's cheque. You actually have to do your homework. You have to read your papers. You have to read the press releases before they go out.' What it means is that directors have to take responsibility as directors, not just occupy those positions for the sake of an honorarium or some remuneration, and that they can themselves be liable. What we had in the James Hardie case, I think, was the High Court being spot-on in terms of the liability of those directors—those that tried to hide behind the claim, 'Well, I didn't read the press release, so I'm not liable.'

In relation to phoenix companies, which are much worse, we should not apologise for the action that we are taking, even involving a level of retrospectivity in this legislation. When the member for Goldstein talks about sovereign risk, I think he is using an expanded definition of 'sovereign risk' to bring this sort of activity that the government is involved in into the definition of 'sovereign risk'. I am concerned about sovereign risk, as we all are, but I am also concerned about employees' entitlements, because time and again we have seen under this government and the former government companies going belly-up and employee entitlements going out the window. Here we are talking about activity that is despicable activity, deliberately setting up companies to do the wrong thing, maximising the money to certain individuals and minimising any liability.

So I have no hesitation in standing up in the House today and supporting this legislation, notwithstanding the fact that there are elements of retrospectivity in the legislation, because what I would say is that it should not cause concern if the conduct that we are talking about is captured retrospectively. It is not outside the bounds. This notion of 'retrospectivity never at any cost' is rubbish. I believe in retrospectivity in appropriate cases. When it comes to phoenix activity or dishonourable behaviour, you can legislate retrospectively to pick it up, because the threat of that retrospectivity of itself is a powerful deterrent to the shonks. It says to them, 'You're not going to be able to get away with it.'

What it is about is greed, so you have to attack the greed and the loot that they are looking for with, in some instances, the threat of retrospectivity, which might stop certain behaviour. That is the only way. When you talk about deterrent effects, I say to you: when it comes to money and when it comes to this sort of behaviour, deterrence does have an impact in the corporate sector for some of these shonks. If they think they can transfer assets to their partners, their relatives or whatever with immunity and it is not going to be captured or picked up if they are caught out, they will do it. I am not arguing for retrospectivity in every instance—I am not saying that—but what I am saying to you is that in some instances it is warranted. In this instance, to me, it is certainly within the realm and within the principles. It has been, I think, pointed out by other speakers that there has been retrospective legislation in the life of the former government. So they did it—not as a regular occurrence, but on a number of occasions it was done. So let us not be too precious in relation to that. I commend the bills to the House.