Black Economy and Phoenixing: Impact and Recommendations

CORPORATE LAW

Answer 1)
The black economy refers to the section of population who conduct their operations outside
the regulatory framework and the taxation system. In addition, this includes the people whose
identity is known to the regulatory authorities but they evade tax and do not report their
incomes correctly. The black economy is comprised of a range of practices such as the
acceptance and payment of wages outside the book in cash, understatement of takings,
complex financial transactions that makes the tracking of source of funds complicated, and
other money laundering practices. The typical origin of black economy is when restrictions
are imposed by the government on the economic activity in the form of goods and services
being regarded as illegal or imposition of high taxes to ensure the high costing of certain
goods or services. Hence, the black market originates for the manufacture and exchange of
the illegal goods and services. The black economy is further classified into four categories
namely the illegal economy, the informal economy, the unrecorded economy and the
unreported economy. While, the illegal economy includes the economic transactions that are
not allowed as per the statutes, the unreported economy is aimed at evasion of the rules stated
in the tax codes. Further, the unrecorded economy denotes the collection of the economic
activities aimed at bypassing the institutional rules in context of the fair reporting to the
government statistical agencies. Lastly, the informal economy are aimed at minimization of
the costs and thus are not able to benefit from the rights stated in the laws in context of the
social security, torts, financial credit systems and others.
The phoenixing is referred to as the creation of a new company in exchange of the deliberate
liquidation of an old company in order to facilitate the avoidance of tax liability, employees’
dues, and the debts of the creditors. Thus, the outcome of the activity is that the directors and
top management of the new company with a clean record of the corporate yet again use the
old assets and resources of the liquidated company1. The community as a whole is impacted
due to the illegal phoenix activity including the stakeholders namely the employees, the
government, contractors, investors, and others. In addition, the whole society is deprived of
the necessary funds in the vital sectors.
Answer 2)
1 "Pricewaterhousecoopers, Phoenix Activity: Sizing The Problem And Matching Solutions", Fairwork.Gov.Au,
2019, http://www.fairwork.gov.au/Publications/Research/Phoenix-activity-report-sizing-the-problem-and-
matching-solutions.pdf.

The economic impacts of the illegal phoenixing activity on Australia have been described as
follows. It is vital to note that illegal phoenixing activity can occur in any location or
industry, nevertheless it has high prevalence in the in major centres like the building and
construction, cafés and restaurants, mining, transport, agriculture, security services, childcare
services, cleaning, labour hire, payroll services, computer consulting, and others. As per the
Black Economy Taskforce Final Report (Report), there has been an estimation of the annual
direct impact of within the range of $2.85 billion and $5.13 billion, in relation to the illegal
phoenix activity in Australia. In smaller terms, the repercussions of the phoenix activity is the
non-payment of the government revenues, which leads to quite a lesser revenue collection for
regulators, non-payment of the employment dues including awards, and outstanding balances
of debts leading to blockage of money.
Answer 3)
The phoenixing activity can occur in any industry; however, the same is most prevalent in the
Australian construction and building industry. It is significant to note that the Cole Royal
Commission had long ago highlighted the instance of the particularly vulnerable to this
activity in the year 2003 itself2. In addition the building industry that is incidental is also
prone to the said issue. The chief reason for vulnerability of said industries is that company
controllers in the said lines of businesses have a unique set of skills. As a result, even when
the business fails the said skills would force the individuals to remain in the said line of
businesses only. In addition some of the other reasons that contribute towards the occurrence
of the phoenixing activity are stated as follows. It is vital to note that the construction and
building industry is comprised of a number of activities such as the form working,
scaffolding, concreting, bricklaying, plastering, steel-fixing and gyprock fixing. The workers
are hired on the basis of daily wages in the said activities. As a result, in the said activities,
the record keeping is minimal which is otherwise significant to keep the track of the cash. In
addition, the employment conditions in the said industry are quite different from the other
industries as stated follows. The employees are often hired in the said industry intermittently
for temporary periods of time. As a result, there are no formal contractual employment
requirements complied with. In addition, there is a large hiring of the migrated workers as
well who do not disclose their true identity details. Further to add, the knowledge of
entitlements is very low in the said category of employees. In addition to the above facts, it
2 Helen Anderson et al., "Defining And Profiling Phoneix Activity", Monash.Edu, 2019,
https://www.monash.edu/__data/assets/pdf_file/0004/906043/defining-and-profiling-phoenix-activity.pdf.