New illegal phoenixing laws to take effect this week

On 18 February 2021, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 will come into effect seeking to curb illegal phoenix activity by introducing new offences and granting additional powers to ASIC and liquidators.

The Act, which was passed by Parliament in February 2020, introduces new measures designed to:

  • hold directors accountable;
  • prevent directors from improperly backdating their resignation; and
  • prevent directors from leaving their company with no directors.

Illegal phoenixing commonly occurs when company directors transfer the assets of an existing company to a new company without paying true or market value and leaving debts with the old company. Once the assets have been transferred, the old company is placed into liquidation and the directors continue to operate the business under the new company. When the liquidator is appointed to the old company, the creditors cannot be paid as there are no assets to sell.

From 18 February 2021, companies will no longer be able to remove the last remaining director on ASIC records. To enforce this, ASIC will reject lodgements submitted using a Form 484 - Change to company details or Form 370 - Notification by officeholder of resignation or retirement to cease the last appointed director without replacing that appointment.

Further, if ASIC is notified of a director’s cessation date more than 28 days after the effective date, then the effective date will be overridden and replaced with the lodgement date.

The introduction of this new legislation renders it vital that anyone who has resigned as a company director ensures that their resignation has been correctly lodged with ASIC.

Increase to personal bankruptcy threshold

As part of its response to the Coronavirus pandemic, the Australian Government implemented a number of temporary changes to the bankruptcy and insolvency laws. This insolvency moratorium was the subject of a prior post here, but in summary included:

  • an increase of the minimum debt required to issue a bankruptcy notice from $5,000 to $20,000;
  • an increase of the minimum debt required to issue a creditor’s statutory demand from $2,000 to $20,000;
  • an extension of the timeframe for debtors to take action to resolve a bankruptcy notice or creditor’s statutory demand from 21 days to 6 months;
  • the suspension of directors' personal liability for insolvent trading.

Whilst these measures were previously extended from 30 September 2020 to 31 December 2020, there was no further extension and they have now expired.

In late 2020, the Bankruptcy Amendment (Bankruptcy Threshold) Regulations 2020 (Cth) was passed to permanently increase the minimum required debt to issue a bankruptcy notice from $5,000 to $10,000. This change took effect on 1 January 2021.

A copy of the Attorney-General’s Media Release issued on 18 December 2020 can be accessed here.

There has been no corresponding increase to the minimum required debt to issue a creditor’s statutory demand.

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Christmas Closure

We wish you compliments of the season and thank you for your support in 2020.

Our office will be closed for holidays from 3pm on Wednesday 23 December 2020 and will reopen at 8:30am on Monday 11 January 2021.

Insolvency reforms pass Parliament

Last week amendments to Australia's insolvency regime passed through Parliament, giving effect to the framework proposed by the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth). The Federal Government first announced the reforms as part of the 2020-21 Budget, touting that they would "strengthen our insolvency system to better support small businesses dealing with the economic impact of COVID-19."

The legislation draws on key features of the Chapter 11 bankruptcy model in the United States to introduce a new, simplified debt restructuring process that can be accessed by incorporated businesses with liabilities of less than $1 million.

Inserting a new Part 5.3B into the Corporations Act 2001 (Cth), the legislation introduces:

  1. a streamlined debt restructuring process for eligible small businesses;
  2. a simplified liquidation pathway; and
  3. additional measures to support the insolvency sector to respond to the reforms.

The framework will be available for eligible small businesses from 1 January 2021.

A copy of the Media Release issued on 10 December 2020 can be accessed here.

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A Safe Harbour from the perils of COVID-19?

As COVID-19 continues to have an unprecedented impact on businesses across Australia, it is likely the safe harbour regime will be utilised more than ever before. In this blog post we outline the protections offered by the regime and how it will complement the recently announced temporary insolvency reforms to offer a saving grace in such uncertain times.

A safe harbour applies from the time that directors, who suspect insolvency, start to develop and implement a course of action that is reasonably likely to lead to a better outcome for the corporation than immediate administration or liquidation. It also operates as an exception to the insolvent trading provisions of the Corporations Act 2001 (Cth), however under the Government’s recently announced temporary economic measures, personal liability for insolvency has been waived for six months.

Safe harbour rules require directors to take an active role in the restructure, while acting honestly and genuinely. They must also use up-to-date financial information to assess the likely outcome of a restructure and comply with obligations to pay employee entitlements when they fall due. Meeting all of the company’s taxation reporting obligations, while properly maintaining books and records is also a requirement.

Under safe harbour rules, directors must engage with key stakeholders to develop and implement the restructuring plan. Once it becomes clear that a corporation is not viable, the protection of safe harbour will cease. Protections are not absolute and will require extensive advice and planning as well as consultation with key stakeholders. Their object is to encourage a restructure if it is reasonably likely to lead to a better outcome for the corporation.

Safe harbour does not to protect against other breaches of the Corporations Act and a liquidator may well still be entitled to pursue a creditor for an unfair preference.

The Safe Harbour regime signals a significant change to the corporate insolvency and restructuring landscape in Australia. They seek to maximise the opportunity for preserving a going concern to assist with a corporate restructure in appropriate circumstances. The reforms present a useful step towards dispelling the long-held view that insolvent trading in Australia is focused on punitive outcomes rather than promoting entrepreneurship. Given the uncertainty posed by the rapidly evolving COVID-19 pandemic, the Safe Harbour regime complements the Government’s temporary economic measures to provide a lifeline for Australian businesses.

You can read more commentary on changes to corporate law in response to the evolving COVID-19 situation here.


tax law

AAT overturns ATO refusal of $65K luxury car tax claim

In the matter of Skourmallas and Commissioner of Taxation (Taxation) [2019] AATA 5535 the Administrative Appeals Tribunal overturned a decision of Australia Taxation Office after it disallowed a taxpayers claim for input tax credits and decreasing adjustment, resulting in a shortfall of $65,652.

Mr Skourmallas was a motor vehicle dealer who acquired an Audi R8 Coupe as trading stock for a purchase price of $263,750.01. He subsequently claimed GST input tax credits of $19,809 and decreasing adjustment of $45,843.

However, these claims were rejected by the ATO which asserted that he was not carrying on an enterprise but had instead obtained the vehicle for personal use. Mr Skourmallas subsequently applied to the AAT for review of the ATO’s decision.

Before the Tribunal, the ATO relied on the fact that Mr Skourmallas did not operate from a car yard or showroom to support its claim that Mr Skourmallas was not carrying on an enterprise. Further, the ATO asserted that Mr Skourmallas was dishonest and not a credible witness.

The AAT accepted that while Mr Skourmallas could be perceived as belligerent, this did not render him dishonest.

In making a determination as to whether Mr Skourmallas was in fact conducting a business, the court noted that the low kilometres travelled by the car were consistent with it having been obtained as trading stock. Further, it accepted that despite lacking the features of a traditional motor vehicle dealership, Mr Skourmallas’ business model was consistent with the niche market in which he traded.

Ultimately, the AAT ruled that Mr Skourmallas was entitled to the GST input tax credits and luxury car tax decreasing adjustment. However, it did advise that Mr Skourmallas ‘prudently improve’ his record keeping.

AAT considers stay of disciplinary action against deregistered liquidator

In Kukulovski and A Committee convened under section 40-45 of the Insolvency Practice Schedule (Corporations) [2020] AATA 40, the Administrative Appeals Tribunal applied Australia’s new insolvency practitioner discipline regime to review the cancellation of a liquidator’s registration.


Mr Kukulovski was a registered liquidator, who in 2014 and 2016 was the subject of ‘an extraordinarily lengthy investigation’ by ASIC. The investigation ensued after ASIC was made aware of concerns relating to Mr Kukulovski’s competence and diligence as an external administrator between 2009 and 2012.

In January 2019, ASIC gave Mr Kukulovski a show cause notice seeking a written explanation detailing why his liquidator registration should continue. ASIC was not satisfied with Mr Kukulovski’s response and convened a Committee in May 2019, pursuant to section 40-45 of the Insolvency Practice Schedule (Corporations).

In December 2019, the disciplinary Committee relied on section 40-55(1)(c) to cancel Mr Kukulovski’s registration. It also determined that ASIC should publish the Committee’s report of its decision.

Mr Kukulovski subsequently appealed to the AAT for review of the Committee’s decisions. Further, he sought that in the interim, implementation of the decisions be stayed pursuant to section 41(2) and for confidentiality orders under section 35(2).

Power to order a stay section 41(2)

In considering Mr Kukulovski’s application, the Tribunal noted a stay may only be granted if the Tribunal deems it ‘desirable’ to do so after “taking into account the interests of any persons who may be affected by the review.” The Tribunal also applied the approach outlined in Scott and ASIC [2009] AATA 798 which emphasises the importance of identifying how a stay order is likely to meet the purpose referred to in section 41(2).

In considering the interests of those affected by the review, the Tribunal accepted that Mr Kukulovski would be impacted, after he submitted he would suffer loss of livelihood and reputational damage. Namely, Mr Kukulovski cited Ristevski and TPB [2019] AATA 5196, asserting that he traded under the name of a national practice and would likely be unable to continue doing so if news spread that he was the subject of regulatory action. As such, he submitted that the loss of livelihood would impact his care for his pregnant partner, and his ongoing support of his former partner. However, the court concluded that he would be able to continue work as a registered liquidator and that his skill set therefore retained economic value.

Further, Mr Kukulovski asserted that he had suffered reputational damage as a result of the way in which ASIC and the Committee had conducted the investigation, and that he would continue to do so.

The Tribunal asserted that many of Mr Kukolovski’s difficulties would be remedied if his business partner took over the external administration of the entities Mr Kukulovski was forced to vacate. ASIC agreed this would be an acceptable outcome, however Mr Kukulovski disagreed.

In considering ASIC’s interests, the Tribunal noted it would not be adversely impacted if the cancellation decision were stayed, provided it was not also prevented from communicating news of what happened to the wider public. However, it was accepted that staying the decision may have some impact on ASIC’s perceived credibility and efficacy.

Public Interest

The Tribunal noted that as Mr Kukulovski was seeking a stay of the publication of the cancellation decision, it was important to consider cases which discussed open justice. In doing so, the court cited ASIC v AAT [2009] FCAFC 185 which provides that a Tribunal should be cautious about making confidentiality orders under section 35 in cases where the public might be deprived of information it would otherwise expect to receive about administrative action being taken.

Accordingly, the Tribunal noted that whilst Mr Kukulovski was not accused of dishonesty or intentional bad behaviour, that was not a complete answer to ASIC’s opposition to a stay. Rather, Mr Kukulovski’s incompetence had the potential to cause significant damage.

Mr Kukulovski submitted that he had since undergone extensive professional education and developed insight into his practice and conduct. Further, he contended that as the event occurred some time ago and there had since been no serious question about his performance, there was nothing to suggest he was a risk to the public.

Despite accepting that the events were not recent, the AAT expressed concern that Mr Kukulovski would not be sufficiently monitored to detect unsatisfactory performance, as ASIC could not be expected to spend extra resources doing so. As such, the AAT held that public interest militated against staying the cancellation decision, and that if the decision to cancel was stayed, public interest weighed in favour of allowing publication of the report.


The AAT ultimately refused to stay the Committee’s cancellation decision on public interest grounds, but did stay the Committee’s decision that ASIC publish the disciplinary Committee’s report. Despite this, ASIC was not prevented from stating that it had taken regulatory action against Mr Kukulovski and that the Committee’s decision was the subject of an AAT review.

Insolvent trading moratorium extended to New Year

This morning the Federal Government announced it will continue to provide regulatory relief for businesses impacted by COVID-19 by extending temporary insolvency and bankruptcy protections until 31 December 2020.

These measures, originally set to expire on September 30, include:

Bankruptcy changes

  • Increase in the minimum debt threshold for a creditor-initiated bankruptcy procedure from $5,000 – $20,000;
  • The time to respond to a bankruptcy notice increased from 21 days to 6 months;
  • An extension of the protection period for individual’s declaring an intention to present a debtor’s petition extended from 21 days to 6 months.

Insolvency Changes

  • Increase in minimum amount for a statutory demand from $2,000 – $20,000;
  • Increase in time to respond to a statutory demand from 21 days to 6 months;
  • Temporary suspension of directors’ personal liability for insolvent trading for six months (egregious cases of dishonesty will still attract criminal liability);
  • Insertion of s 588GAAA which provides an additional temporary safe harbour provision during the six-month period.

Treasurer Josh Frydenberg commented that “the extension of the temporary changes to the insolvency and bankruptcy laws will continue to provide businesses with a regulatory shield to help them get across to the other side of the crisis.”

AAT rejects ‘very important’ claim for GST tax refunds

In a recent decision, the Administrative Appeals Tribunal has rejected a taxpayer’s claim for GST refunds after they claimed to be operating a gold refinery.

In Very Important Business Pty Ltd and Commissioner of Taxation (Taxation) [2019] AATA 1120, Very Important Business (VIB) claimed it was entitled to input tax credits with respect to scrap gold it made in the course of its business. In doing so, VIB contended that it was a refiner of precious metal pursuant to the A New Tax System (Goods and Services Tax) Act 1999. Further, VIB claimed that subsequent supplies of gold it had refined into bullion were GST-free supplies. Accordingly, it submitted that it was under no obligation to remit GST on those dealings and was entitled to claim full input tax credits on all its acquisitions.

However the Commissioner of Taxation disputed these propositions. In doing so, it questioned whether the acquisitions occurred as claimed in VIB’s invoices and records, arguing that VIB provided insufficient evidence of consideration for all acquisitions of scrap gold. Further, the Commissioner submitted that VIB’s record keeping was ‘seriously deficient’.

In March 2016, after seeking to verify the relevant GST return, the Commissioner withheld GST refunds that would have otherwise been paid to VIB. The following May, the Commissioner issued an amended assessment of net amount GST in which he disallowed the input tax credits. The Commissioner also conducted an assessment for penalty on the basis of reckless non-compliance with taxation laws.

In June 2016, VIB objected to the amended assessments on the basis that it had provided consideration for some of the acquisitions and that the Commissioner had erred in verifying those cash payments. VIB also contended that the Commissioner had erred in evaluating the legal position regarding input tax credits claimed for the purchase of scrap gold from unregistered suppliers. In doing so, VIB claimed that it had correct tax invoices. Despite this, in November 2016, the Commissioner disallowed VIB’s objection.

VIB subsequently brought the matter before the tribunal, seeking review of the Commissioner’s objection decisions.

Accordingly, the tribunal was required to determine whether VIB was entitled to input tax credits in the sum of $55,153 for the acquisition of $606,702 of scrap metal in the quarterly tax period ending 31 December 2015. Ultimately, determination of this issue was dependent on whether VIB had made creditable acquisitions for the purposes of the GST Act.

The matter was considered on 4 June 2019, at which the Tribunal was not satisfied that VIB had taken over the refinery business or that it was regularly refining prior to 31 December 2015. The Tribunal also concluded that there were inadequacies in the evidence and documentation of the alleged purchase transactions, including that a number of the transactions were actually made by the refinery’s previous operator.

Ultimately, the Tribunal was not satisfied that VIB was a refiner of precious metal in the relevant period, however did accept that VIB was undertaking some activities and was therefore ‘carrying on an enterprise’ for the purposes of the GST Act. In doing so, the Tribunal affirmed the Commissioner’s objection decisions in relation to both the assessment of net amount and penalties.

Strict new anti-phoenix measures to take effect today

Earlier this year, the senate passed the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 through parliament.  The Bill, which was originally introduced in February 2019, and reintroduced in July 2019, presents new measures to combat Australia’s increasing illegal phoenix activity. In doing so, it amended the Corporations Act 2001, A New Tax System (Goods and Services) Act 1999 and the Taxation Administration Act 1953 from 1 April 2020.

Phoenix activity occurs where a new company is created to continue the business of an existing company. Typically, this will involve a company entering into a transaction with another related entity for the sale of its assets. This allows the business to continue, however the new company will not have any of the liabilities that the original business had, such as obligations to creditors, the ATO or employees. This activity becomes illegal where the old company is placed in liquidation after all assets have been transferred.

In seeking to curb this illegal activity, the Bill has introduced the following measures:

Creditor-defeating disposition

The Bill introduces new offences for creditor-defeating disposition. In doing so, it provides that a creditor-defeating disposition will be made out where:

  1. The consideration paid to the company for the relevant property was less than the lesser of:
    • The market value of the property; or
    • The best price that was reasonably obtainable for the property, having regard to the circumstances existing at that time.

2. The disposition has the effect of preventing the property from becoming available for the benefit of the company’s creditors in the winding-up of the company; or hindering, or significantly delaying that process.

Further, the Bill introduces criminal and civil penalties for company officers that fail to prevent the company from making creditor-defeating dispositions, or other persons that facilitate creditor defeating dispositions.

ASIC permitted to recover company property

ASIC will be entitled to order a person to:

  1. return to the company for distribution among creditors, any property that was transferred subsequent to the initial creditor-defeating disposition;
  2. Pay an amount equal to the benefit the person received from the creditor-defeating disposition;
  3. Transfer property that was purchased with the proceeds of sale of a creditor-defeating disposition.

Limitations on Director resignations

Directors will be prohibited from backdating resignations or ceasing to be a director if this would leave the company with no directors.

GST Liabilities

Under the A New Tax System (Goods and Services Tax) Act 1999 and Taxation Administration Act 1953, from 1 April 2020, the Commissioner of Taxation will be entitled to collect estimates of anticipated GST liabilities. Company directors may also be made personally liable for their company’s unpaid GST, Luxury Car Tax and Wine Equalisation Tax liabilities in certain circumstances.

 Tax Refunds

The Bill will amend the Taxation Administration Act 1953 to enable the ATO to retain tax refunds where a taxpayer has failed to lodge a return or failed to provide other information that might affect the amount of a refund.

In delivering his second reading speech to Parliament, the Honourable Michael Sukkar, Assistant Treasurer and Minister for Housing, asserted that “this bill will give our regulators additional enforcement and regulatory tools to better detect and address illegal phoenix activity and, importantly, to prosecute or penalise directors and others who facilitate this illegal activity, such as unscrupulous pre-insolvency advisors.”