Phoenixing and Black Economy in Australia: Challenges and Recommendations

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Corporate Law

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QUESTION-1
BLACK ECONOMY
The “black economy” is referred to those people who did not
operate within the taxation and regulatory system or who did not
correctly report their tax obligations to the authorities in order to gain an
unfair advantage (Treasury, 2017). There are a wide range of practices
which are involved in the black economy including moonlighting,
understatement of assets, welfare fund, phoenixing, sharing economy
contractors without declaring their income, accepting cash wages which
are off the books and others. Many other illegal and complex transactions
such as money laundering are also taken into account. It can be sum up
as a cash-based system in which transactions are recorded by parties in
different books of accounts which are referred as “number two accounts”
(Bajada, 2017). It is also called shadow economy, cash economy, and
underground economy. There are three key attributes of the black
economy which assist in understanding its meaning and its negative
implications.
The first one is that it involves illegal activities. For instance, it is
used for the trade of goods and services which are illegal in nature by
parties while hiding their income from these practices. The second
attribute is that it involves the process of money laundering through
which the illegal payments which are received by the parties are
converting into legal money (Pfitzner & McLaren, 2018). The third
characteristic is that people prefer cash in this economy since it is
difficult to track by authorities. There are many negative implications of
this economy on the GDP of a county, and it also led to negative
economic growth (Treasury, 2017). It enables people to avoid their tax
obligations and while promoting the use of illegal receipts and payments
for goods and services which negatively affect the interest of the country
as a whole.

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PHOENIXING
“Phoenixing” is referred to an illegal practice which is a part of the
black economy. It is defined as a process in which individuals incorporate
a new company with the objective to carry on the business of an old
company that is being wound up to avoid tax obligations and other
liabilities (Treasury, 2017). It is a deliberate attempt that is made by
individuals to reduce the current business operations and shut down the
business to avoid repaying obligations towards employees, customers,
and the government. In recent years, the number of cases involving
phoenixing has increased drastically which lead to negative implications
on the economy of the country (Anderson, 2014).
Generally, this strategy is used by large enterprises that have
higher liabilities as compared to small corporations. It is an illegal
practice because the assets of the old company are transferred to the
new organisation at unfair market value due to which the company did
not have any capital left to repay its debts and other liabilities (Anderson,
2014). This process involves a number of parties including liquidators,
pre-insolvency adviser, phoenix operators, dummy directors, and valuer.
Along with illegal phoenix companies, there are legal phoenixes
companies as well in which the directors genuinely try to save the
company’s business by transferring its assets to a new entity without
engaging in illegal practices.
QUESTION-2
Due to the growing issue of phoenixing, the Australian economy is
facing negative implications, and it is harming the overall economic
growth of the country. Since the number of cases involving this practice
is increasing, it has gained attention of authorities. As per the study
conducted by the Black Economy Taskforce, the Fair Work Ombudsman
(FWO) and PricewaterhouseCoopers, phoenixing cause a loss of between
$1.8 and $3.3 billion to the Australia economy (Treasury, 2017). These

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losses are caused by the revenue generated by the government,
businesses, and employees working in the country.
An estimated $1.66 billion loss is faced by the Australian
government as a result of unpaid tax on an annual basis which shows the
negative implications of phoenixing on government revenue (Treasury,
2017). Workers face challenges since phoenixing lead to increase in
number of unpaid salaries, redundancy pay and wages. They are likely to
loss $298 million in superannuation and wages on a yearly basis due to
phoenixing. The Taskforce against Phoenix activity reported that the
losses caused due to phoenixing are likely to increase more than $5
billion per year (Treasury, 2017). These losses include the unpaid debts
and liabilities of businesses to their partners, suppliers, and taxation
obligations.
QUESTION-3
In Australia, phoenixing is present in almost all industries, and they
face negative consequence of this illegal practice. However, it is most
prevalent in the building and construction industry of Australia. It is a
major industry in Australia that contributes substantially to its overall
economic growth. It has reported that the industry contributes around 8
to 10 per cent to the overall economy of the county and it also
contributes to increasing employment level in the country as well
(Cartwright, 2018). While at the same time, the industry is facing an
issue due to high rate of insolvency of companies as well. Around one-
fifth and one-quarter of total insolvency cases in Australia are from the
building and construction industry (APH, 2019). These businesses are not
able to repay their debts towards suppliers and tax obligations. However,
most of them did not close their operations; instead, they transfer their
assets to a new company to continue their operations while avoiding their
liabilities. Tax plays a crucial role in the industry since parties and clients
decide whether to enter into a contract or not based on the tax obligation
of the contract.