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Director IDs: Will this end phoenix activity?

June 25, 2021Cash Flow , Late Payments

Director IDs: Will this end phoenix activity?

The Australian Taxation Office (ATO) will be rolling out Director Identification Numbers (DINs) in 2021. The introduction of DINs is to help address illegal phoenix activity and help protect businesses from being affected by the damage it causes.  

The Australian Business Registry Services (ABRS) is now beginning to test the new platform with a controlled number of existing Directors  before 31 October, 2021.  Once the testing is complete, existing Directors will have until 30 November 2022 to obtain a Director ID.

What Is Phoenixing?

Phoenixing or pheonix activity is when a company that has been closed “rises from the ashes” and continues to engage in the same trading activities that it did while open, giving the impression that nothing has changed.

According to the ATO, ‘Illegal phoenix activity is when a company is liquidated, wound up or abandoned to avoid paying its debts. A new company is then started to continue the same business activities without the debt.’

Phoenixing leaves a string of suppliers, subcontractors, employees and customers without proper payment.

The difference between legal and illegal phoenix activity

Legal phoenix activity is when a business becomes insolvent, and the owners use a new company to start a similar business, in order to rescue the insolvent business.

It is crucial to distinguish between the legitimate rebirth of a company and illegal phoenixing, so as to not deter genuine entrepreneurship in the Australian economy.

Phoenix activity is illegal when:

  • A company or corporate entity is deliberately liquidated;
  • The entity intends to violate the interests of its creditors and evade tax, employee entitlements, debts and other liabilities;
  • The entity continues to operate by setting up a new entity in its place (company property and assets are taken from the first company and transferred to the new one).

Illegal phoenixing affects both small businesses and corporate entities, but not all companies are aware it’s happening to them.

How to identify illegal phoenix activity

Businesses looking to identify illegal phoenix activity should ask the following questions:

  • Has the company you’re dealing with changed its name without notifying anyone?
  • Have the directors changed but the business is still being operated in a similar fashion?
  • Does the director have a history of failed businesses and/or have they filed for bankruptcy before?

What’s being done to address illegal phoenixing?

The passing of the ‘Combating Illegal Phoenixing Bill’ in 2020 reflects the Australian government’s increased efforts to address issues of corporate and financial crime and fraud. The legislation will  enable ASIC and liquidators to take increased action to combat illegal phoenix activity. 

The introduction of Director Identification Numbers is one element of the new legislation – all directors will be required to apply for a DIN, which will be recorded in an ATO database and made available to the public. The ID will be kept permanently, so even if a director moves overseas, stops being a director, or changes their name, their identity and any relationships they’ve had with companies over time is on record.

How to avoid the impacts of illegal phoenixing

While the government has put legislation in place to deter would-be phoenix companies, it’s better to put a strategy in place to avoid interacting with these businesses than to deal with the consequences of having all their debt left to you.

When you create a new credit application for a customer, take the time to verify the director/s with a driver’s license and have the director/s sign a guarantee.

You should also look into additional protection by registering security over their goods on the Personal Property Securities Register (PPSR)

PencilPay makes this process simple by enabling businesses to onboard their customers in seconds with all the right checks and balances. Get in touch to find out more.