Andrew Leigh

Tanking in business is known as "Phoenix Activity", Sydney Morning Herald,                  21 February 2017

Perhaps my most famous constituent is Nick Kyrgios, Australia's top-ranked male tennis player. But despite his extraordinary serve and blasting forehand, there is one aspect of Kyrgios's game that I, along with other Australian sports fans, cannot condone.

Not trying. Failing on purpose. Tanking.                                 

Australians hate it when their stars don't play to win. So when Nick tanked a tennis match at the Shanghai Masters last year, he copped it from all corners (when John McEnroe is criticising your attitude, you know there's a problem).

It's not just in tennis. We've seen allegations of tanking in the AFL, as well as major league baseball, Olympic badminton, Asian soccer and the National Hockey League.

Tanking in sport lets down the fans. But when it happens in business, people can lose their jobs and companies. Tanking in business is known as "phoenix activity".

Phoenix activity is where the directors of a struggling business transfer its assets to a new company (generally owned by the same people), then actively ensure the struggling business fails. Tanking the business allows them to avoid paying the money owed to the failed company's creditors, which are often the company's employees, other small businesses and the Australian Tax Office.

By tanking, the company directors "win" all the assets of the failed company and lose all of its liabilities. While there are many complexities, businesses can fail and be resurrected in this manner again and again, like a phoenix – the fabled bird reborn from its own ashes.

The spread of phoenix activity throughout Australia hurts decent small businesses. 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.

While illegal phoenix activity is most prevalent in the small to medium business sector, the Senate Economics References Committee has stated it is a problem "throughout the economy". A 2015 Productivity Commission report estimated that there are 2000 to 6000 phoenix companies operating in Australia, and that they cost us $1.8 billion to $3.2 billion per year. That's about $100 for every man, woman and child in the country.

In the last tax year, the tax office conducted almost 1000 audits into phoenix schemes and raided several offices. In some cases, this led to charges. For example, a Tasmanian business owner was charged with fraud in December 2016 by the Australian Securities and Investment Commission due to alleged phoenix activity.

According to the charges, the owner's original company operated a chain of restaurants. Then, they sold all the plant and equipment to another company – without being paid. They reassigned the restaurant leases to the other company. Finally, they put the original company into liquidation, leaving creditors with no assets.

What can governments do? In Queensland, the state government has recently announced important state-based reforms to ensure the security of payments to subcontractors.

But at a federal level, the government has done nothing to tighten the rules that catch phoenix activity. It's a pity, because there's a few obvious fixes. Company directors could be forced to undergo an identity check before starting a new company. Director Identification Numbers would allow directors suspected of fraudulent phoenix activity to be picked up by regulators early before they do too much damage. Penalties could be increased for breaches of director's duties and could be used more often. Directors of companies could be held liable for unpaid employee wages in phoenix operations.

Phoenix activity – tanking the business – can have a dreadful impact on people's lives. Australians won't cop it.

It's time the wings of this bird were clipped.

Andrew Leigh is the Shadow Assistant Treasurer and the Shadow Minister for Competition and Productivity. This opinion piece was first published in the Sydney Morning Herald on Tuesday, 21 February 2017.