Phoenix operators cheat economy to the tune of $3.2bn

Phoenix companies cost workers, creditors and the taxman up to $3.2 billion a year, according to the Fair Work Ombudsman.

The agency's research points to data from the Australian Taxation Office, estimating that approximately 6,000 companies in Australia have engaged in phoenix activity.

The total annual cost to the economy is between $1.78 billion and $3.19 billion. This comprises up to $665 million owned to employees in the form of unpaid wages and entitlements and up to $1.93 billion for businesses, such as creditors who go unpaid.

The cost to the government could be as high as $610 million in missing taxes and the cost to fund the General Employee Entitlements and Redundancy Scheme (GEERS), which pays out workers whose entitlements go missing.

While the Fair Work Ombudsman (FWO) research does not include any specific data on the printing industry, it shows that phoenix activity is widespread among small to medium-sized enterprises (SMEs) as well as micro businesses under $2 million turnover. 

Illegal phoenix activity is defined as "the evasion of tax and other liabilities, such as employee entitlements, through the deliberate, systematic and sometimes cyclic liquidation of related corporate trading entities", according to the report, which was prepared by PricewaterhouseCoopers.

One advantage that phoenix operators have over legitimate companies is that they can wipe off debts and continue to undercut the market.

"By knowingly avoiding debts to other businesses, tax debt and employee entitlements, phoenix businesses are able to offer lower prices than their competitors," said the report.

Phoenix companies have distinct characteristics to watch out for, such as when the director of a new entity is a family member of the former company or the new firm uses a similar trading name, premises or phone number.

"Many serial phoenix operators will not be director of the companies that are liquidated, but will have family members or close associates as the director of the company - though this is only ‘on paper’ and the phoenix operator will run the day-to-day operations of the business," according to the report, which can be downloaded free here.

Data prepared by Dun & Bradstreet found that of the 10,200 companies liquidated in the 2009/10 financial year, 29% had one or more directors previously involved with a liquidated entity and 20% had directors associated with two or more liquidated entities.

The FWO report includes advice on how to identify phoenix operators:

• The company fails to lodge tax returns and/or Business Activity Statements

• The business records or taxation records significantly understate or overstate the operations of the business, including debts owed

• Withheld payments such as PAYG, superannuation and child support payments are kept by the business

• Workers are pressured to take leave

• Workers have their employment status changed from permanent to casual

• Workers are underpaid

• Equipment, machinery and uniforms are not replaced as needed

Read ProPrint's 2010 report on phoenixes in the printing industry.