Nature and impact of illegal phoenix activity

1.1 Illegal phoenix activity occurs when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements.⁵ Sometimes referred to as fraudulent phoenix behaviour, illegal phoenix activity is distinct from standard phoenix activity where corporate structures are replaced for legitimate business purposes.

1.2 Illegal phoenix activity impacts employees, creditors, competing businesses and the Government.⁶ It has particular impacts on:

• tax revenue — reduced Commonwealth and State taxation revenue, including income tax, goods and services tax and payroll tax;
• employee entitlements — reduced superannuation and other entitlements;
• compliant businesses — phoenix operators receive an unfair advantage by ‘undercutting’ competitors due to their artificially low cost structures;
• contractors/sub-contractors — non-payment for work performed. This can have a flow on effect resulting in business failures and financial distress; and
• Government expenditure — increased spending on monitoring and enforcement.

1.3 Since 1996, there have been three main estimates of the cost of illegal phoenix activity:

• in 1996, the Australian Securities Commission estimated the cost to the Australian economy to be as much as $1.3 billion annually⁷;
• in 2012, the Fair Work Ombudsman estimated the total impact to be between $1.78 billion and $3.19 billion per annum⁸; and
• in 2018, PricewaterhouseCoopers estimated the annual direct cost to the Australian community to be between $2.85 billion and $5.13 billion for 2015–16.⁹

Phoenix Taskforce

The precursor Inter-Agency Phoenix Forum

1.4 Australian Government activities to address illegal phoenix activity date back to the 1970s and 1980s in relation to Bottom of the Harbour schemes¹⁰, and includes the Cole Royal Commission into the Building and Construction Industry in 2003.

1.5 To assist in addressing illegal phoenix activity, the Department of the Treasury (Treasury) sought a range of reforms in 2009. Four of the 11 proposed law reforms were introduced between 2010 and 2012 through amendments to legislation.¹¹

1.6 During the period that law reforms were considered and introduced, the Australian Taxation Office (ATO) established an Inter-Agency Phoenix Forum (the Forum) to address illegal phoenix behaviour. Adopting a whole-of-government approach to addressing phoenix risk was consistent with Government expectations and ATO strategic approaches. The Forum was led by the ATO, with the first meeting held in March 2011. The terms of reference for the Forum were developed in 2011, establishing the purpose of the Forum as:

…bringing together key government agencies in order to identify, design and implement cross agency strategies to mitigate and deter fraudulent phoenix activity.

The Inter-Agency Phoenix Forum (the forum) will also assist the ATO in delivering on a Government commitment to address fraudulent phoenix behaviour, with particular emphasis on delivering on specific commitments to government during the 2011-2015 financial years. The forum will achieve this through the timelier sharing of “intelligence” and also by Agencies jointly focussing on the more egregious phoenix operators.¹²

The ATO’s information disclosure restrictions affecting the Inter-Agency Phoenix Forum

1.7 Section 355-25 of the Taxation Administration Act 1953 (Tax Act) states that it is an offence for a taxation officer to disclose protected information to another entity.¹³ However, under section 355-70 of the Tax Act, protected taxation information can be disclosed to an officer of a Prescribed Taskforce for the purposes of the Taskforce (where a Taskforce can be prescribed in the Taxation Administration Regulations). Section 355-70 of the Tax Act includes that section 355-25 does not apply if:

• the record is made for or the disclosure is to a prescribed taskforce; and
• the record or disclosure is for or in connection with a purpose of the prescribed taskforce, where a major purpose of the taskforce must be protecting the public finances of Australia.¹⁴

1.8 Almost immediately the Forum recognised significant limitations on information sharing in relation to potential phoenix cases, including on the ATO’s information sharing powers under section 355 of the Tax Act, as it was not a prescribed taskforce.

1.9 The Forum considered and initially dismissed the idea of seeking to establish a prescribed taskforce under the Tax Act in June 2011. However, the issue of establishing a prescribed taskforce was reconsidered in November 2011, leading to individual Forum member entities canvassing support from their executive for a prescribed taskforce. By April 2012 members of the Forum reported that their entities would support the establishment of a taskforce to address the difficulty of information sharing between government entities. Over the subsequent 24 months, the ATO wrote to Forum entities about the establishment of a Taskforce seeking a formal response to the proposal. By March 2014 a proposal had been made to Government to establish a prescribed taskforce to overcome restrictions on the dissemination of the ATO’s information. The ATO intended that, once approved, the Taskforce arrangement would enable the ATO to act as a clearing house where it would receive information and then disclose the information to other Taskforce entities (where such on-disclosure was not prohibited by the originating entity).

Establishing the Phoenix Taskforce

1.10 The Phoenix Taskforce was established on 17 November 2014 through an amendment to the Taxation Administration Regulations. The Taxation Administration Regulations 2017¹⁵, regulation 67, includes the Phoenix Taskforce as a prescribed taskforce for the purposes of section 355-70 of the Tax Act.

1.11 The Phoenix Taskforce is a prescribed taskforce to ‘allow for disclosure of protected tax information by taxation officers to officers of the Taskforce for the purposes of the Taskforce’. On-disclosure rules in the Tax Act continue to protect taxation information once it is disclosed. This means that authorised officers from Taskforce member entities (referred to as ‘taskforce officers’) may only on-disclose taxation information that was provided by the ATO for taskforce purposes.

Operation of the Phoenix Taskforce

1.12 In December 2018, the Phoenix Taskforce comprised 34 Commonwealth, state and territory government agencies working together through information sharing and data matching to identify, manage, monitor and take enforcement action against suspected illegal phoenix operators. There are 13 Commonwealth entities and 21 state and territory entities (see Appendix 2).

1.13 Arrangements for the Phoenix Taskforce include all member entities meeting on an annual or biannual basis at Phoenix Taskforce meetings. A Phoenix Taskforce Steering Committee has also been established and meets on a quarterly basis. There are five Steering Committee members; the ATO, Australian Securities and Investments Commission (ASIC), Fair Work Ombudsman, Department of Jobs and Small Business, and Australian Border Force (in the Department of Home Affairs).¹⁶ The ATO provides both the Chair and secretariat services for the Taskforce and the Steering Committee. The Phoenix Taskforce also works in collaboration with the Serious Financial Crime Taskforce¹⁷ to identify and treat serious financial crime.

Phoenix Taskforce purposes, goals and deliverables

1.14 The Taskforce’s purposes are to: bring together key Government agencies to allow the effective exchange of information and a collaborated approach to mitigate and deter illegal phoenix behaviour (thereby protecting the public finances of Australia); and develop a course of action and preferred alternatives.

1.15 The Phoenix Taskforce has five key goals and deliverables with respect to mitigating and deterring illegal phoenix activity, as shown in Table 1.1.

Table 1.1: Phoenix Taskforce goals and deliverables

Note a: The 2018 Prescribed Phoenix Taskforce Statement of Principles updates the purposes to refer to illegal rather than fraudulent phoenix activity.

Source: Prescribed Phoenix Taskforce Charter, September 2017 and Prescribed Phoenix Taskforce Statement of Principles, May 2018.

Law reform

1.16 In February 2017, the Phoenix Taskforce submitted a law reform proposal to the Minister for Revenue and Financial Services. Subsequently, Treasury released a consultation paper Combatting Illegal Phoenix Activity in September 2017, canvassing a range of options for reforms to laws to address illegal phoenix activity. In the 2018–19 Budget, the Government announced a package of reforms to the corporations and tax laws to combat illegal phoenix activity. Two pieces of legislation addressing phoenix law reforms and director identification numbers were introduced to Parliament on 13 February 2019 for consideration and subsequently referred to the Senate Economics Committee.¹⁸ The Senate Economics Committee is due to report on these bills by 26 March 2019.

Rationale for undertaking the audit

1.17 The Australian National Audit Office (ANAO) selected illegal phoenix activity for audit because the activity imposes considerable costs on the Australian Community (estimated as up to $5.1 billion for 2015–16), is a long-standing problem and requires extensive cooperation between government entities, which is often challenging to implement. The audit was intended to provide assurance on whether the Phoenix Taskforce is effectively addressing illegal phoenix activity at a whole-of-government level.

Audit approach

Audit objective, criteria and scope

1.18 The audit assessed the effectiveness of the Phoenix Taskforce to combat illegal phoenix activities.

1.19 To form a conclusion against the audit objective, the ANAO adopted three high-level criteria:

• Does the Phoenix Taskforce have effective governance arrangements?
• Has the Phoenix Taskforce developed and implemented effective strategies and processes to combat illegal phoenix activities?
• Do the Phoenix Taskforce performance measurement arrangements enable it to assess effectiveness?

1.20 The audit focused on the ATO’s and other taskforce entities’ (particularly Steering Committee members) contributions to the establishment and operation of Phoenix Taskforce governance arrangements, strategies and processes to combat illegal phoenix activity, and performance measurement arrangements. The audit considered how Taskforce entities collaborate to combat illegal phoenix activities. The audit did not examine the activities of state and territory members of the Phoenix Taskforce, but considered the extent of participation of all member entities in Taskforce activities, and received feedback from nearly all members against the audit objective and criteria. To date the Phoenix Taskforce has mainly coordinated intelligence, with a relatively small number of matters underway. Accordingly, more attention was given to intelligence gathering, strategies for detection, information sharing and performance measurement, with less attention to compliance, enforcement, prosecution and prevention activities.

Audit methodology

1.21 Audit procedures included:

• examining the ATO’s records relating to the Inter-Agency Phoenix Forum, Phoenix Taskforce and ATO phoenix activities, including charters and meeting records, risk assessments, strategies, disclosure documents, intelligence and operational policy and guidance, assessments and plans, evaluations, performance measures and reports to Committees and the responsible Minister;
• interviewing and collecting key documentation from Phoenix Taskforce member entities, particularly Steering Committee members, including details of information sharing arrangements, enforcement actions that could be applied to combat phoenix activities, phoenix strategies and referral processes, phoenix work programs, and details of intelligence and enforcement performance measurement; and
• examining the Treasury’s records in relation to the 2009 and 2017 consultation processes and the phoenix law reform proposals.

Entities included in the audit

1.22 The ATO was included in the audit as the lead entity and secretariat for the Phoenix Taskforce. The audit team interviewed and sought supporting documentation from nearly all taskforce members. The audit included a greater focus on the Phoenix Taskforce Steering Committee members due to their role in setting the strategic direction of the taskforce and oversight of operations. The audit also included the Treasury due to its role in the Phoenix Law Reforms.

1.23 The audit was conducted in accordance with relevant ANAO auditing standards at a cost to the ANAO of $637,000.

1.24 The team members for this audit were Tracey Martin, Nathaniel Loorham, Sonya Carter, Amanda Reynolds, Elizabeth Wedgwood, Chiara Edwards, Lachlan Fraser and Andrew Morris.

Has a charter been established and implemented to support effective coordination and collaboration?

2.1 The Inter-Agency Phoenix Forum and the Phoenix Taskforce have operated under a Charter (or Terms of Reference) that was first agreed in November 2011 and endorsed, subject to ATO approvals, at a Phoenix Taskforce Steering Committee meeting in September 2017. The Charter has been reviewed on several occasions to reflect changes in the nature of the cross-agency arrangements.¹⁹

2.2 The September 2017 Prescribed Phoenix Taskforce Charter includes details of the legal status, context, purpose and goals, information sharing activities, roles and responsibilities, resourcing, termination arrangements and duration of the agreement.²⁰ The Charter does not include performance measures, agreed modes of regular review and evaluation, and approaches to identifying and sharing risks and opportunities. These matters have been largely addressed in supplementary documentation, such as the Evaluation Framework that was agreed by Steering Committee members in 2017, or through agenda items at Taskforce meetings, such as sharing phoenix risks and opportunities.

2.3 Of 28 Taskforce members interviewed by the ANAO in September and October 2018, only eight reported having reviewed charters, frameworks, risk documentation or policy and guidance for the Taskforce at least once.

Membership

2.4 In February 2015, an Inter-Agency Phoenix Forum (and Taskforce) meeting agreed that Taskforce members would be asked to exchange letters rather than enter a more formal memorandum of understanding. This approach was considered fit for purpose.

2.5 Consistent with requirements established in the Charter, the ATO has maintained a register of members²¹ and documentation to evidence the inclusion or removal of members. Documentation also includes correspondence from taskforce entities accepting the invitation to participate in the Taskforce and agreeing to the Prescribed Phoenix Taskforce Statement of Principles for Information Exchange between Taskforce Agency members.²²

2.6 Appendix 2 provides a list of members, including the dates of letters of offer from the Chair of the Taskforce, entities’ agreement to the Statement of Principles and indication of intent to participate in the Taskforce. Membership increased from 15 member entities in February 2015 to 34 member entities in December 2018.

Roles and responsibilities

2.7 The September 2017 Charter sets out roles and responsibilities for the chair, secretariat, members and Steering Committee. The ATO is responsible for providing the Chair and secretariat for the Taskforce (and its committees and working groups). Members are expected to commit to active participation.

2.8 Roles and responsibilities remained largely unchanged between the initial terms of reference for the Inter-Agency Phoenix Forum and the September 2017 Phoenix Taskforce Charter. A key exception is the introduction of the Steering Committee for the Taskforce in August 2016. When the Steering Committee was introduced its key purpose was to manage the operational issues of the Phoenix Taskforce. In September 2017 this changed to include providing strategic direction for the Taskforce. In January 2019, the ATO advised that the broader Taskforce is largely involved in intelligence-sharing and operational matters. Table 2.1 sets out roles and responsibilities for members and the Steering Committee of the current Charter.

Table 2.1: Roles and responsibilities documented in the Phoenix Taskforce Charter

Source: Prescribed Phoenix Taskforce Charter, September 2017.

2.9 The Steering Committee has continued to manage operational matters, provided input to and oversight of the Top Targets Strategy, commented on the ATO’s Phoenix Strategy, through ASIC contributed to the Data Fusion Project, and contributed to the development of the Evaluation Framework and its application. However, the Steering Committee has not had a broader role in formulating strategy, providing oversight of information sharing and referrals, or monitoring effectiveness (beyond contributing to and reviewing Phoenix Taskforce Steering Committee Reports).

Resourcing

2.10 The Phoenix Taskforce is not explicitly Budget funded,²³ and each member entity resources its contribution to the Taskforce from business as usual budget allocations.

2.11 The ATO leads the Taskforce, and in 2018 allocated approximately 100 full time equivalent staff to addressing illegal phoenix activity.²⁴ It develops documentation and intelligence, undertakes most activities and leads operations. The ATO considers that all its phoenix work contributes to and cannot be separated from the work and outcomes of the Taskforce. ASIC is the most active other member of the Taskforce, and estimated that in 2018–19 some 29 full time equivalent staff would contribute to phoenix activities, and 3 to specific Taskforce activities.

2.12 The other member entities did not measure their resourcing for phoenix activities but typically advised that total resourcing, including for Taskforce activities such as information sharing, intelligence and operations, would be less than one full-time equivalent staff over a 12 month period.

Governance structure

2.13 Following the establishment of the Phoenix Taskforce in November 2014, the Inter-Agency Phoenix Forum continued to meet and it was agreed that the Phoenix Taskforce would be a standing agenda item at the Forum meetings (a separate meeting was not needed). The Forum ceased on 1 August 2017, and thereafter the meetings were called Phoenix Taskforce meetings.

2.14 The Phoenix Taskforce has established a Steering Committee, four working groups and operation teams. The Taskforce reports through the Steering Committee and the ATO to the Minister. Figure 2.1 provides an overview of the Phoenix Taskforce governance structure focusing on the Taskforce and key committees, working groups, operations and reporting relationships.²⁵

2.15 As discussed previously, the Phoenix Taskforce Steering Committee comprises five entities, was established in 2016 initially to manage operational issues of the Phoenix Taskforce and also became responsible for setting strategic direction when the Forum was ceased in August 2017. From August 2016, working groups were established for law reform, intelligence and operational matters, and a Communications Working Group was established in 2018. Phoenix Taskforce operation teams have been established since 2016.

2.16 Table 2.2 provides an overview of arrangements for each committee and working group. There are inconsistencies in the governance arrangements established between committees and working groups, including in relation to terms of reference, membership arrangements²⁶, planned meeting frequency compared to meetings held, standing agenda items and documentation of meetings. In January 2019, the ATO advised that the Phoenix Taskforce would develop principles to articulate arrangements for working groups, including terms of reference and membership, noting that the Taskforce takes an agile and dynamic response and aims to reduce red tape.

Table 2.2: Arrangements for Phoenix Taskforce committees and working groups, to November 2018

Note a: Membership has been: 5 to 15 entities (Intelligence Working Group); 5 to 26 entities (Operational Working Group); 5 agencies (Law Reform Working Group); and 3 agencies (Communications Working Group).

Source: ANAO analysis of ATO meeting records and interviews with key staff, including secretariats and operation team leads.

2.17 Of 28 Taskforce members interviewed by the ANAO, 26 reported having attended taskforce meetings, with 11 entities reporting making contributions to agenda items at least once. Eighteen of the 28 entities considered there was a culture where members felt comfortable to engage, ask questions and challenge proposals and position in Taskforce meetings. Seventeen entities considered there was sufficient opportunity to participate, contribute, make decisions and/or endorse activities. Thirteen member entities reported having attended at least one working group meeting or operation team meeting.

Have effective information sharing arrangements been established and used by Taskforce members to support intelligence and operational matters?

Legislative provisions for information sharing powers

2.18 Prescribing the Phoenix Taskforce under Taxation Administration Regulation permits ATO officers to share taxation information with Taskforce members for the purposes of the Taskforce. Most member entities (26 or more) have information sharing provisions included in the legislation they administer that enables them to share specified information with the ATO. Only 12 member entities can share with all Taskforce members, as sharing provisions generally restrict sharing to a limited number of other Taskforce member entities. In some cases, while information can be shared with the ATO or some other Taskforce members, there are restrictions on this information being further disclosed.²⁷ In all cases, entities had regard to the Privacy Act 1988 and the Australian Privacy Principles when considering disclosure of information that was of a personal, sensitive and/or protected nature.

Memoranda of understanding

2.19 Information sharing powers under legislation are supplemented in a number of cases by memorandums of understanding (MOUs) between specific member entities to facilitate information sharing activities. In September and October 2018, 18 Taskforce member entities advised the ANAO that they had one or more MoU with one or more Taskforce member entities to support information disclosure. In total, 30 MoUs were in place, of which 25 were examined by the ANAO.

2.20 Of the 25 MoUs provided, four were head agreements with subsidiary agreements between multiple entities²⁸, one was an instrument of authorisation, one was a ministerial authority for information disclosure, one was a letter of agreement and the other 18 MoUs were entity to entity. The stated purpose of each MOU was similar, generally intending to provide for cooperation and mutual assistance through the exchange of information, intelligence and expertise to maximise outcomes through collective compliance, education and/or enforcement activities. Most reiterated each entity’s corporate purpose and the relevant sections of the entity’s legislation that enabled the sharing of information. Guidance on administrative protocols followed. This included procedures for requesting and receiving information, delegations for authorising the exchange, and how this was to be recorded. All MoUs included commencement and termination dates and a requirement for each entity to make the other entity(s) aware of any amendments to their governing legislation.

Information disclosures made by the ATO for the purpose of the Phoenix Taskforce

2.21 The ATO’s disclosures must comply with relevant ATO accountable authority instructions, policy and guidance, and arrangements established for the Taskforce, including the Prescribed Phoenix Taskforce Statement of Principles for Information Exchange between Taskforce Agency members and real-time referral processes established by the Taskforce.

Non-tax information disclosures

2.22 The ATO adopts an approach, in circumstances where there are no privacy or confidentiality issues, of making information publicly available. For example, on the ATO’s website the Phoenix Taskforce section includes a range of information, including its outcomes, a list of members, a description of illegal phoenix activity and details of work of the taskforce. The section also includes case studies, details of where taxpayers can access help and where to report illegal phoenix activity, and the publication of Inter-Agency Phoenix Forum meeting minutes and documents such as The economic impact of illegal phoenix activity.

Protected information disclosures

Number and volume of disclosures

2.23 The number of disclosures from the ATO to other Taskforce members has increased significantly over the life of the Phoenix Taskforce, as shown in Table 2.3.

Table 2.3: Number of protected information disclosures from the ATO to Phoenix Taskforce entities, 2014–15 to 2017–18

Note a: Total disclosures made in a financial year is calculated by adding total requests made to total requests on hand at the end of the previous financial year, and then deleting requests rejected and requests on hand at the end of the current financial year.

Source: ANAO summary of protected information disclosures reported in ATO annual reports 2014–15 to 2017–18.

2.24 Over the four years since the introduction of the Taskforce, the ATO’s annual reports have recorded increases in: the number of Taskforce member entities to which the ATO has disclosed information (two rising to 28 entities); the total number of disclosures (two rising to 687 disclosures); and the average number of disclosures per entity (one rising to 25 disclosures). In the first two years of the Taskforce, most disclosures were initiated by entities other than the ATO requesting information and in the third and fourth year the vast majority of disclosures were initiated by the ATO. The main entities receiving the disclosed information were state and territory revenue offices and ASIC.

2.25 The volume of information shared per disclosure also increased dramatically in 2017 and remained high in 2018. Individual disclosures can contain significant information, for example:

• the ATO has disclosed the same document to 27 agencies and has had approval to make oral disclosures for a particular purpose to 32 agencies; and
• individual disclosures have related to the phoenix behaviours of as many as 4412 companies and trusts related to 110 individuals, 70 entities, 22 groups and/or 19 operations.

Compliance with disclosure requirements

2.26 Appendix 3 sets out the process for disclosing protected information. Under the process, each Phoenix Taskforce entity nominates information ‘gatekeepers’ who request and receive protected information for that entity for the purposes of the Taskforce. All requests must identify the purpose of the disclosure, the entity to which it relates and the proposed recipient. Requests for documentary disclosures must also include the documents to be disclosed (where the request is ATO-initiated) or a description of the documents required (where initiated by other members). For oral disclosures, the request must specify the ATO officers who will disclose protected information and the time period for which they are authorised to do so. Usually these disclosure authorisations are provided for meetings, including Steering Committee, working group and operation team meetings.

2.27 The ATO Information Disclosure Team handles all requests for disclosure of protected information, including Phoenix Taskforce requests. The Team confirms that the request for disclosure is to be made to a gatekeeper/authorised officer of the Phoenix Taskforce member entity and is for, or in connection with, a purpose of the Phoenix Taskforce.²⁹ Once satisfied the request is in order, an Information Disclosure Team officer endorses the disclosure of information for phoenix purposes, and then forwards the Phoenix Taskforce disclosure request to a Senior Executive Service officer delegated to make and authorise disclosures under the Taxation Administration Act 1953. The delegate may disagree or either: agree that the disclosure of the relevant documents is covered by subsection 355-70(1) for phoenix purposes; or authorise (and agree to) the nominated officers making oral disclosures for a specified time period.

2.28 The ANAO examined the disclosure request and approval process for 262³⁰ of 814 disclosures made between 2014–15 and 2017–18 to determine if they were consistent with the ATO’s disclosure process requirements. The ANAO identified instances where elements of the disclosure process were inconsistent with requirements relating to approvals, disclosure periods and disclosure records. Inconsistencies mainly involved oral disclosures, and included:

• 64 oral disclosures where documented authorisation was provided after the disclosure period commenced³¹;
• incomplete records of oral disclosures made. Records of the 42 disclosures made in the sample prior to 1 January 2018 were stored in the Information Disclosure Officers’ personal Outlook email folders and subsequently deleted.³² The ATO advised in February 2019 that records of 83 disclosures in the sample were maintained in a folder on the Information Disclosure Team shared drive where access is restricted. Information on that drive was not provided to the ANAO during audit fieldwork. In summary, for the sample of 125 requests for oral disclosure, no records were provided to the ANAO to demonstrate how many oral disclosures were made, when they were made, by whom, to whom, or what they were about; and
• one written disclosure where documentation relied upon for approval does not clearly demonstrate the disclosure was agreed.³³

2.29 In February 2019, the ATO advised that while no breaches of the law occurred, in response to the findings in the audit that it had not established adequate recordkeeping arrangements to maintain records of oral disclosures, it was taking steps to improve these recordkeeping processes.

2.30 The ANAO also sought to reconcile total disclosure numbers by year to the reported requests and disclosures in ATO’s annual reports. The number of requests and disclosures in 2016–17 and 2017–18 could not be reconciled with the numbers reported in ATO’s annual reports. For 2016–17 the number of rejected and on hand disclosure requests could not be reconciled.

ATO Phoenix records of disclosures and information received

2.31 A central record is not maintained of information disclosed to the ATO by Phoenix Taskforce agencies for Taskforce purposes, including details of on-disclosure limitations imposed on information shared with the ATO. Rather, records are kept in various electronic locations in the ATO’s intelligence systems and case management systems, and it is not possible to readily consolidate records of intelligence shared in Phoenix cases.

Have guidelines been developed to support coordinated intelligence and operational matters?

2.32 Phoenix Taskforce member entities have internal intelligence and operational management guidance and processes to detect, and if appropriate take action against, potential illegal phoenix behaviour as part of their business as usual activities. Notably, the ATO has a suite of intelligence management guidance, including intelligence assessment and briefing templates, and an Intelligence Guide. The ATO’s Private Groups and High Wealth Individuals business line has a range of guidance to support intelligence, case selection and case management activities.³⁴ The guidance and templates support decision-making, including decisions to take no further action, escalate intelligence for possible case selection, and decisions to pursue cases and refer as appropriate to other areas within ATO for action.

2.33 The Phoenix Taskforce provides an opportunity for entities to collaborate and undertake joint intelligence and operation management activities. To support these activities the ATO has developed and issued the following Phoenix Taskforce guidance notes and supporting documentation:

• Real Time Referral Process — Guidance Note for Participating Phoenix Taskforce Agencies (April 2018);
• Multi-Agency Operations — Guidance Note for Participating Phoenix Taskforce Agencies (March 2018);
• Multi-Agency Operations — Guidance Note for ATO Operation Leads and Officers (March 2018);
• Making an ATO-initiated request to disclose protected information;
• Phoenix Taskforce Phoenix Hotline — Guideline for referral process (September 2018);
• presentation on the Phoenix Taskforce Top 50 — Response Plan; and
• phoenix taskforce intelligence assessments, operation plans, and operation status report templates.

2.34 These documents provide guidance to member entities on intelligence sharing activities, including procedures for individual joint operation working groups to develop strategies and operational plans and produce quarterly case status reports. They also provide guidance on procedures for ATO staff releasing information to the Taskforce and in general.

2.35 Beyond information sharing guidance and references to intelligence actions in the Real Time Referral Process developed in April 2018, there are no intelligence development guidance notes for the Taskforce. The ATO develops the intelligence assessments for consideration by the Phoenix Taskforce Intelligence and Operational working groups — there is no guidance supporting other entities contributions to these assessments (and as a result, member contributions are not detailed or consistent). The Taskforce Secretariat advised the audit team that the intelligence assessments developed for consideration of phoenix matters by the Intelligence Working Group were not based on ATO or Phoenix Taskforce guidance documentation.

2.36 There is also limited guidance to support decision-making in the intelligence and operational working groups. The Real Time Referral Process advises that matters should be escalated if appropriate. The main guidance that supports decision processes for the Intelligence and Operational working groups is the Phoenix Taskforce Top 50 — Response Plan, which includes points for consideration, including the jurisdiction in which the behaviour is occurring and the action the Taskforce will take and what taskforce members will be involved. There would be benefit in the Taskforce developing some criteria to assist with the assessments and ratings to support decisions to proceed with or reject matters considered at working group meetings.

Have barriers to addressing illegal phoenix activity been identified and associated strategies implemented?

2.38 Since 2014, a number of studies, reviews and inquiries have identified barriers to addressing illegal phoenix activity and made recommendations to address these barriers. This work has included the:

• Senate Economics References Committee Inquiry into Insolvency in the Building & Construction Industry (2 December 2015);
• Productivity Commission report into Business set up, transfer and closure (5 September 2015);
• Black Economy Taskforce Final Report (31 October 2017); and
• Productivity Commission report on Data Availability and Use (8 May 2017).

2.39 Recommended solutions have included legislative reforms for information sharing, and for greater enforcement powers and penalties relating to security deposits, director penalties, promoter penalties and a phoenixing offence.

2.40 Between November 2015 and May 2017, the ATO briefed Treasury on areas where it considered reform would assist it to address illegal phoenix activity. The Phoenix Inter-Agency Forum (and Taskforce) has considered some recommendations from these reviews, identified that existing legislation does not provide sufficient tools for the Taskforce to address illegal phoenix activity and had a strategy of pursuing law reform since 2016. In August 2016, the Phoenix Taskforce Steering Committee members formed a Law Reform Working Group. Figure 2.2 provides an overview of the reviews and progression of proposals from the Phoenix Taskforce through Treasury leading to exposure drafts proposing amendments to tax, companies and Fair Entitlements Guarantee legislation and the subsequent introduction of legislation to Parliament.

2.41 In February 2017, the Phoenix Taskforce developed an initial law reform proposal through the Law Reform Working Group and presented the proposal to the Minister for Revenue and Financial Services to progress the law reform. Treasury released a consultation paper Combatting Illegal Phoenix Activity in September 2017, canvassing a range of options for reforms to laws to address illegal phoenix activity. The consultation period closed on 27 October 2017. Treasury received 50 submissions from a variety of sources, including ASIC, academics, individuals, professional bodies and firms that offer legal, insolvency and liquidation and accounting services. Many reforms suggested by the Taskforce were included in the 2017 consultation paper released by Treasury, although several priority reforms, such as changing the definition of director under the legislation, were not included.

2.42 The 2017 consultation paper outlined 11 areas of reform, with 14 specific proposals. Five of these broad reforms areas had been proposed in an earlier 2009 consultation (mentioned in Chapter 1).³⁵ Seven of the 14 proposals (see Appendix 4) from the 2017 proposal were accepted by the Government and included in the 2018–19 Budget. The Phoenix Hotline was implemented in July 2018 and restricting the voting rights of related party creditors was implemented in December 2018. The draft legislation for the remaining five proposals was released for public consultation between August and September 2018 and was introduced to Parliament on 13 February 2019 and was subsequently referred to the Senate Economics Committee. The Senate Economics Committee is due to report on these bills by 26 March 2019.

Other Phoenix-related legislative changes underway

2.43 Other concurrent processes have also resulted in legislative changes aimed at assisting the Taskforce to more readily address illegal phoenix activity.

2.44 The review of the Fair Entitlements Guarantee Scheme administered by the Department of Jobs and Small Business consulted on a range of measures to address corporate misuse of the scheme in May to June 2017. Draft legislation released in October 2017 includes four new civil penalty provisions, amendments to existing criminal provisions, and an expansion of parties who can initiate civil recovery proceedings. The legislation is currently before the Parliament.

2.45 The Director Identification Number (which supports better matching of director’s relationships across companies by government agencies) is being progressed as part of the government’s Modernising Business Registers process. An initial consultation process was undertaken in July 2017, with a subsequent consultation process conducted from 13 July 2018 to 17 August 2018.³⁶ Consultation on the Exposure draft of legislation closed on 26 October 2018.³⁷ The legislation was introduced to Parliament on 13 February 2019.

Collaboration and coordination

2.46 At the August 2018 meeting of the Taskforce, the ATO proposed that a compendium of tools and strategies be compiled to provide an understanding of member entities roles and powers to address illegal phoenix activity.³⁸ The ATO has also identified other barriers, including:

• reciprocal information sharing arrangements with Taskforce member entities;
• absence of a whole of Commonwealth intelligence repository to host and analyse data; and
• lack of unique identifiers across Commonwealth for data matching and analysis.

2.47 Taskforce member entities advised that barriers to coordination and collaboration include:

• members not having information sharing powers to support intelligence activities;
• difficulty identifying phoenix behaviour (challenges include detecting the behaviour early, determining intent and notifying other Taskforce members of suspected behaviour); and
• difficulty finding relevance as member entities do not have the same focus or do not function on the same scale as Steering Committee members.

2.48 Entities have taken action to address some of these issues. For example, some entities have sought reciprocal information sharing powers to enable sharing with the ATO, while other members have not sought these powers. The Phoenix Taskforce has identified the absence of reciprocal information as a risk to the Taskforce and its strategies, and at times has sought to raise with members the need to address reciprocal arrangements. Such change is dependent on affected member entities seeking legislative change, including government support, on an entity by entity basis, and will be impacted by broader information sharing considerations particularly concerning privacy. The information sharing barrier and its impact on addressing illegal phoenix activity was also identified in the Final Report of the Black Economy Taskforce.³⁹

2.49 Information sharing barriers are a whole-of-government issue that extends beyond the role of the Phoenix Taskforce. Specifically, in March 2017, Productivity Commission Report No. 82, Data Availability and Use, proposed the introduction of the Data Sharing and Release Act to create consistent rules for data sharing and release, adopting a risk-based approach, and would authorise the sharing of data within the public sector where legislation is currently a barrier to sharing information.⁴⁰ The Government responded to the proposed Act by indicating it will continue to improve availability and use of data, including streamlining data sharing arrangements, and has committed to taking action in response to a number of recommendations from the report.⁴¹

Does the Phoenix Taskforce have effective strategies and processes in place to address potentially illegal phoenix activities?

3.1 The ATO has included phoenix risk as a business, enterprise and strategic risk. Under its enterprise risk management framework, the ATO addresses risk by developing, reporting on and evaluating strategies to mitigate risk. Strategies identified for addressing the phoenix risk in 2011–12 included improving relationships with key internal and external stakeholders (including other government agencies), which would lead to greater levels of collaboration in strategy design, risk mitigation and intelligence exchanges. A key achievement in that year was the establishment of the Inter-Agency Phoenix Forum, as well as promoting phoenix risk through other internal and external forums such as the ATO — ASIC Liaison Forum. Between 2012 and 2018, the ATO further developed existing phoenix strategies and introduced a range of new strategies to address the phoenix risk. Similarly, in 2013 ASIC considered that phoenix was a sufficiently significant issue to develop an ASIC Phoenix Strategy, with the first step being to establish a Phoenix Working Party (now Phoenix Committee). ASIC introduced its first Phoenix Work Program in 2015–16.

3.2 The ATO has made the major contributions to developing and implementing strategies for the Inter-Agency Phoenix Forum and Phoenix Taskforce, and considers that all its phoenix activity contributes to broader government approaches to dealing with the phoenix risk. ASIC has also developed strategies to address the phoenix risk (as discussed above and in paragraph 3.17). Unlike the ATO, ASIC does not view its business as usual activities as constituting the Phoenix Taskforce’s body of work.⁴² No other taskforce entities have explicit phoenix strategies.

3.3 The most comprehensive phoenix strategy is the overarching Phoenix Strategy developed by the ATO and endorsed by the Phoenix Taskforce in February 2018. While focusing on the ATO, the strategy recognises the various contributions across the ATO and partner agencies to dealing with Phoenix activities.

3.4 The Phoenix Strategy contains a work program overview, timeline of activities, opportunities for law reform and innovation, and an outcome and evaluation framework. It also contains additional guidance on the ATO’s approach to addressing illegal phoenix activity, such as governance arrangements and plans supporting the strategy.⁴³

3.5 The Phoenix Strategy adopts an ‘outcomes logic approach’⁴⁴ that focuses on the achievement of five key outcomes (four intermediate and one strategic outcomes). The outcomes were designed in December 2015 as part of an Inter-Agency Phoenix Taskforce Evaluation Framework, and endorsed by the Phoenix Taskforce Steering Committee in September 2017. The outcomes are:

• businesses are aware of and comply with legislative requirements;
• agencies collaboratively identify at risk businesses and connect with them to encourage compliance;
• cyclical phoenix operators have their business model disrupted and are either brought back into the system, removed from the business environment or penalised;
• incentives to participate in phoenix activities are removed and there is greater business and consumer confidence; and
• there is a reduction in the incidence and impact of phoenix (the ultimate outcome).

3.6 Consistent with established regulatory models that emphasise the link between non-compliance risk and regulatory action,⁴⁵ the outcomes align with the key approaches of educate, engage and enforce.⁴⁶ Table 3.1 outlines the link between regulatory approach, risk and relevant Phoenix Taskforce plans or activities.

Table 3.1: Relationship between regulatory approach, risk and action

Note a: The educate strategy operates broadly and extends to medium and high-risk populations, as well as to facilitators, professional bodies and industry associations.

Note b: The engagement strategy operates broadly and is directed at entities involved in illegal phoenix activity, promoters and facilitators, as well as professional bodies and industry associations.

Note c: The enforcement strategy is directed to entities involved in illegal phoenix activity and extends to promoters and facilitators (for example, deregistration of liquidators). Enforcement activities include state-based civil and criminal remedies.

Source: ANAO analysis.

Implementation of educate, engage and enforce approaches

3.7 By addressing illegal phoenix activity through the risk-related approaches of educate, engage and enforce, the ATO has taken a broad regulatory approach to the problem. Under each approach, the ATO has developed a number of sub-strategies and plans. While some of these focus on a specific risk population, others operate broadly and cut across populations.

3.8 Table 3.2 shows the ATO’s strategies and plans, their implementation status and the approach they align to as at November 2018. Most of these are branded as specific to the ATO, while others are branded for the Phoenix Taskforce.

3.9 As shown in Table 3.2, the strategies and plans (under the approaches of educate, engage and enforce) have varying implementation and review dates. The status of individual plans is discussed in further detail below.

Educate strategies

3.10 Since 2012, the ATO has implemented annual communications strategies aimed at raising awareness of illegal phoenix activity within the community. Recent evaluations have found that communication strategies have been successful in building awareness of illegal phoenix activity.⁴⁷ Moving forward, the Phoenix Taskforce has committed to developing a cross-agency communications strategy to promote the Taskforce and its work. A key platform for education involves entities linking their website to the Taskforce website — a number of entities have linked their sites to the Taskforce website, including ASIC.

3.11 As part of the Phoenix Taskforce’s law reform strategy, it submitted a draft proposal for a suite of legislative reforms in February 2017. As discussed in Chapter 2, the reforms underwent a stakeholder consultation process during August and September 2018, with the Treasury⁴⁸ considering the results of that process. The ATO also worked with stakeholders through research initiatives, such as the Melbourne University’s series of publications on illegal phoenix activity.⁴⁹

3.12 There have also been iterations of a Phoenix Staff Capability Strategy, with the most recent in January 2018. These strategies aim to equip staff with the technical expertise to respond effectively to the risk of illegal phoenix activity. From December 2018, staff capability is being addressed as part of the ATO’s broader Tax Evasion and Crime staff capability development program, which identifies phoenix as a priority area.

Engage strategies

3.13 As shown in Table 3.2, the ATO has recently developed strategies that address industries with a heightened risk of illegal phoenix activity. Specifically, the Facilitators and Promoters, Labour Hire and Property and Construction Strategies were developed in 2018. As at November 2018, only the Facilitators and Promoters Strategy had been approved, with the other two strategies still in draft and awaiting approval. Documents provided indicate that the ATO has attempted to address illegal phoenix activities in these industries since at least 2016, although these efforts were haphazard and not supported by formal strategy documents. In the absence of structured performance monitoring arrangements, it is difficult to establish if the activities were effective or if they contributed to achieving desired outcomes. Moving forward, the ATO should monitor its newly created industry-based strategies to obtain a baseline from which future work can be progressed.

3.14 The ATO also has a longstanding Phoenix Early Intervention Strategy for engaging businesses at-risk of phoenixing, with various iterations in place since 2008. Under the strategy, 270 cases were conducted from 2016–17 to late 2018, with more than $10 million in liabilities raised. A specific focus of the ATO has been addressing goods and services (GST) tax non-compliance in the real property and property construction sectors, where there is a history of companies phoenixing to avoid payment of liabilities.⁵⁰ The GST Disengaged Property Developers Strategy has had initial successes in raising additional liabilities following reviews and audits of operators in the sector. The ATO has strengthened its approach to non-compliance through the introduction of the GST on Settlement Program from 1 July 2018.

3.15 The ATO did not effectively implement the Phoenix Watchlist, an initiative funded in the 2013–14 budget to provide a single risk model across government.⁵¹ The Phoenix Watchlist was established in January 2015, however, in September 2017 it was agreed that it be decommissioned as it was not meeting expectations, primarily due to information barriers and lack of use (its most recent use by a Phoenix Taskforce member was in November 2015). The ATO advised the ANAO that Phoenix Watchlist data was still available, but access to the Watchlist ceased in September 2017, as it required portal access, which was not available to member agencies. The ATO has implemented other measures to alert taskforce members to potential phoenix operators, such as the Phoenix Risk Model and Registration Watch.

Enforce strategies

3.16 The Phoenix Taskforce’s enforcement strategies are discussed from paragraph 3.29.

Other Phoenix Taskforce member strategies

3.17 Apart from the ATO, ASIC had the most deliberate approach to addressing illegal phoenix activity of all Phoenix Taskforce members. ASIC, as the government’s corporate regulator, focuses on phoenix behaviour as it relates to misconduct by directors, liquidators and other financial service operators, or where it relates to deliberate misuse of the corporate form. ASIC develops its own annual business plan to address phoenix behaviour, which is tailored to its specific areas of interest.⁵²

3.18 Although ASIC completes its own work, it has regularly worked with the ATO (and other Phoenix Taskforce members) on Phoenix Taskforce projects. ASIC contributed to the ATO-led phoenix law reform submission to Government, is involved in many of the Phoenix Taskforce Top Phoenix Target operations and has worked with the ATO on a Data Fusion Project to better identify persons involved in illegal phoenix behaviour.⁵³

3.19 The ANAO met with the majority of other members of the Phoenix Taskforce in October 2018 and confirmed that they did not have specific strategies to address potential illegal Phoenix activity. The ATO advised the ANAO in January 2019 that there are opportunities to engage the broader Taskforce membership in the development of strategies, and that this is already occurring in relation to labour hire, promoters and facilitators, and property and construction.

Does the Phoenix Taskforce have effective processes for selecting compliance and enforcement cases and making referrals to other bodies such as the Serious Financial Crime Taskforce?

3.20 Since March 2014, the ATO has identified and rated the risk of potential illegal phoenix operators through a Phoenix Risk Model. In accordance with a set of defined business rules, the model produces a profile that enables the ATO to tailor its activities depending on the risks presented by the population. The Phoenix Risk Model operates alongside intelligence gathering activities⁵⁴ to provide the ATO with information to tailor its anti-phoenix activities.

3.21 The Phoenix Risk Model was reviewed by PricewaterhouseCoopers in October 2015. The review found that the model was logical, evidence-based and defensible in its construction when used as an intelligence tool. Notwithstanding, PricewaterhouseCoopers made 12 recommendations for the model’s improvement, which have resulted in modifications being made and tested. The ATO confirmed that it is developing risk rules that will allow it to better target specific potential phoenix cohorts, including more accurately identifying cases requiring treatment in accordance with established plans and strategies.

3.22 Following identification of a potential phoenix operator through the Phoenix Risk Model⁵⁵ or intelligence gathering activities, the ATO uses business as usual processes to determine how the matter will progress. In May 2018, the ATO established a Phoenix Referral Pathway and Phoenix Triage Procedure to support consistency in the way it assesses Phoenix matters. Following initial assessments, a decision to deal with the matter in-house, via the Phoenix Taskforce, or to take no further action is made (see Figure 3.1).

Figure 3.1: Overview of the process leading to treatment of potential illegal phoenix activity

 

 

Note a: Intelligence received includes referrals from the community (for example, through the Tax Evasion Reporting Centre and the Phoenix Hotline), from other ATO business lines via the Phoenix inbox, as well as from liquidators, intermediaries and other third parties.

Source: ANAO, based upon ATO documents.

3.23 As shown in Figure 3.1, only a small percentage of referrals proceeded to the case selection pathway. For example, in 2017–18 only 227 of 1175 (19 per cent) were progressed to consideration of case selection, and of these 201 (89 per cent) received no further action (see Table 3.3). In 2017–18, only 26 referrals (2 per cent) resulted in either a case being created by the ATO Phoenix Team, referral to another area of the ATO, referral to the Phoenix Case Team or no further action because they were already a phoenix matter.

Table 3.3: The ATO’s internal reporting of Phoenix referrals

Note a: In 2015–16, the ATO recorded the priority of the referral as low, medium or high. It did not refer to a Phoenix risk rating.

Note b: Total actioned is the number of referrals where the ATO recorded taking a clear action in relation to the referral.

Note c: Matters progressed include where a case was created, where a case had already been established prior to the referral or where the matter was on-referred to another ATO business line.

Note d: Matters not progressed include where there was no phoenix risk identified or the risk was insufficient to justify further action.

Source: ANAO analysis of ATO’s phoenix referrals spreadsheet provided by ATO in August 2018.

Selection of Taskforce matters

3.24 With the Phoenix Taskforce becoming increasingly operational,⁵⁶ it has designed and implemented a Top Phoenix Targets Strategy to mitigate and deter high-risk operators engaging in illegal phoenix activity. Operations conducted under the Top Phoenix Targets Strategy involve Commonwealth and State Government agencies working together to address targets under a whole-of-government approach. The evolution of the Top Phoenix Targets Strategy is shown in Figure 3.2. An initial list of 110 phoenix targets was refined to 22 Top Phoenix Targets presenting the highest risk, involving 1120 insolvency events, 22 bankrupt individuals, $1.2 billion owed to creditors and $508.8 million owed to Government. Implementation of the strategy led to four candidates being endorsed to become operations in September 2016 (although one of these matters was finalised in June 2017), with a further 12 operations endorsed in January 2018.

Figure 3.2: Evolution of the Top Phoenix Targets Strategy (January 2015 to November 2018)

 

 

Source: ANAO, based upon ATO documentation.

3.25 For a matter to be selected as a Top Phoenix Target it must be high-risk, as determined by meeting at least one of the following criteria:

• candidate has a high media profile;
• candidate has been highlighted as a phoenix risk by five or more Phoenix Taskforce members; or
• candidate is of high significance to two or more of the following entities: ATO, Australian Criminal Intelligence Commission, Australian Federal Police, ASIC, Fair Work Ombudsman and the Department of Jobs and Small Business.

3.26 Potential matters are referred by individual Taskforce members, including the ATO, and are then analysed by the ATO for relevance to the above criteria.⁵⁷ Matters that satisfy the criteria undergo a comprehensive intelligence assessment,⁵⁸ which is disclosed to likely operation members and an Intelligence Working Group.⁵⁹ The Intelligence Working Group escalates matters it considers appropriate to an Operational Working Group,⁶⁰ which in turn escalates matters to the Phoenix Taskforce Steering Committee for endorsement. The need for an Intelligence Working Group and an Operational Working Group with overlapping roles is not clear, with the ATO advising that there may be no role for the Intelligence Working Group moving forward. There is also opportunity for the ATO to better define the risk and materiality concepts to be applied by working groups to ensure that the most suitable individuals become Top Phoenix Targets. As discussed in Chapter 2, current guidance allows matters to progress ‘if appropriate’.

Referral of cases identifying potentially criminal behaviour

3.27 Where potentially criminal behaviour is identified, either through business as usual or Top Phoenix Target compliance activity, the matter (or a part thereof) should be referred to the appropriate area or external body to handle. A benefit of cross-agency Top Phoenix Target operations (discussed from paragraph 3.33 onwards) is that they bring together a range of government agencies, each with their own powers to address illegal phoenix behaviours. Member entities (such as the ATO, ASIC, the Australian Federal Police and state law enforcement agencies) have criminal investigation powers. ATO criminal investigations can be referred to its internal Criminal Investigations Team, the Serious Financial Crime Taskforce⁶¹ or the ATO’s Complex Investigations Team (a joint initiative between the ATO and the Australian Federal Police). The ATO advised the ANAO that as at November 2018, the Phoenix Taskforce had made 10 referrals to the ATO’s Criminal Investigations Team, six referrals to the Serious Financial Crime Taskforce⁶², and four referrals to the Complex Investigations Unit. At the same time, the Serious Financial Crime Taskforce had endorsed investigations for three of the referrals from the Phoenix Taskforce and endorsed 15 matters relating to illegal phoenix behaviour. The ATO advised that complex criminal, civil penalty and/or recovery action before the courts may take several years to finalise.

3.28 Prosecution powers are reserved to Commonwealth and state Directors of Public Prosecutions, although some Taskforce entities, including ASIC and the ATO, can prosecute certain administrative and civil offences. Members of a Top Phoenix Target operation can coordinate criminal investigations to enhance the likelihood of achieving a successful prosecution, and have done so as reported in Chapter 4. Table 4.4 indicates that the Taskforce had contributed to 12 criminal convictions from 16 criminal prosecutions as at February 2019.

Has the Phoenix Taskforce effectively progressed its compliance, enforcement and prosecution activities?

3.29 The ATO’s Phoenix Team within the Private Groups and High Wealth Individuals business line performs an annual program of reviews and audits of potential phoenix operators. These business as usual compliance activities have produced a significant increase in liabilities raised and cash collected over the past two years, as shown in Table 3.4.

Table 3.4: The ATO’s Private Groups and High Wealth Individuals phoenix compliance programa

Note a: In March 2019, the ATO advised that Private Groups and High Wealth Individuals raised liabilities of over $925 million and returned around $371 million in cash to the community and completed over 1,230 audits and reviews for the Phoenix Taskforce from inception (November 2014) to 31 December 2018.

Source: ATO advice.

3.30 Other ATO business areas also address illegal phoenix activity through business as usual functions.⁶³ An example of this is the ATO Debt Team, which manages debt owed to the ATO. The Debt Team collects debts owed to the ATO by illegal phoenix operators, and put in place a number of specific phoenix-related debt strategies to address the risks posed by phoenix operators (for example, a higher risk of insolvency).

3.31 ASIC’s business as usual compliance program involves enforcement action against registered liquidators, directors, companies and facilitators potentially involved in illegal phoenix activity. Outcomes of ASIC’s enforcement activities to address illegal phoenix activity between August 2013 and 1 September 2018 are summarised in Table 3.5. In 2017–18, ASIC completed 53 investigations (including joint operations with the ATO) focused on illegal phoenix activity. ASIC also undertakes more general work such as in disqualifying directors of multiple failed companies and prosecuting people who do not keep appropriate records following reports to ASIC from registered liquidators.

Table 3.5: ASIC enforcement action outcomes against illegal phoenix activity and pre-insolvency advisors

Source: ASIC Briefing Paper, October 2018.

3.32 Notwithstanding the increased compliance activity and results from the ATO’s Phoenix Team in the past two years, the total amount of compliance activity in the ATO, ASIC and through the Taskforce operations (15 cases⁶⁴ discussed below) is not high in relation to the population of individuals potentially involved in illegal phoenix activity. The ATO has estimated this population to be more than 33,000 potential illegal phoenix operators in 2017.⁶⁵ As discussed in Chapter 1 and further in Chapter 4, PricewaterhouseCoopers estimated the annual direct impact of illegal phoenix activity to be between $2.85 billion and $5.13 billion for 2015–16. The compliance caseload reflects the resourcing priorities of Phoenix Taskforce members.

Top Phoenix Targets operations

3.33 As mentioned previously, the Phoenix Taskforce has developed and is implementing a Top Phoenix Targets Strategy to address egregious phoenix operators. The strategy involves conducting cross-entity operations, whereby Phoenix Taskforce members work collaboratively to take action against the target. Phoenix Taskforce members with an interest in the target opt-in to the operation, with a commitment to sharing information and working towards shared outcomes. Under the current model, operation members do this through business as usual activities, according to their own legislative powers and responsibilities.⁶⁶ The benefits of conducting cross-entity operations include:

• members have greater access to information;
• the ability to identify, and use a broad range of powers to combat, wrongdoing across Commonwealth and State Government; and
• Taskforce members, phoenix operators and the public seeing illegal phoenix activity being dealt with on a practical level, using a whole-of-government approach.

3.34 As at November 2018, there were 12 active Top Phoenix Target operations with three more having been completed or ceased.⁶⁷ The ATO has led or leads all current operations, with 16 other Phoenix Taskforce members participating in at least one operation. A summary of the 15 operations that were active in 2018 is contained in Table 3.6.

Table 3.6: Top Phoenix Target operations

Note a: Operation names have been omitted.

Note b: One matter endorsed as a Phoenix Taskforce matter has been omitted from the table as, upon further ATO investigation, it was identified that the matter was based on inaccurate data. The matter was finalised by the Phoenix Taskforce Steering Committee prior to it endorsing an operational plan on 30 June 2017.

Source: ANAO analysis of Top Phoenix Target operational plans and status reports.

3.35 Top Phoenix Target operations are underpinned by an operational plan. These plans have elements of the key approaches of educate, engage and enforce, although the nature of targets has meant that the focus of operations is more at the engage and enforce end of the spectrum in practice.⁶⁸ Guidance and templates have been developed to help ensure plans contain sufficient detail and are fit for purpose, with limited additional oversight provided by the Phoenix Taskforce Steering Committee.⁶⁹ All active operation members are expected to contribute to the operational plan, which captures the operation’s profile, desired outcomes, deliverables, resourcing and risks.

3.36 Operational plans for Top Phoenix Target operations were of a good standard. For the 15 operational plans observed, all bar one was completed in accordance with Phoenix Taskforce guidance. Key deliverables of the plans were particularly clear and provided a set of actions expected of members to address the target, although these would benefit from consistently attaching a timeframe for completion.

Success of Top Phoenix Target Operations

3.37 From the outset, operations are required to identify the likely wrongdoing by the target(s), including anticipated legislative breaches. This is contained in the Operation Plan, as are the treatment options for Taskforce members. These are in the form of administrative, civil and criminal actions (see Table 3.7).

Table 3.7: Likely actions against Top Phoenix targets

Note a: Ceased as a Top Phoenix Target operation, however, ATO-only administrative action continued.

Note b: Completed as a Top Phoenix Target operation, but actions continued.

Source: ANAO analysis, based upon meetings with Top Phoenix Target Operation Leads and Top Phoenix Target Operational Plans.

3.38 During the audit, the ANAO met with 11 Top Phoenix Target operation leads. All operation leads felt that their operation was on track to achieve success, highlighting a number of initial successes, both in addressing targets and in coordinating a whole-of-government approach to a shared problem. Initial successes include:

• raising significant liabilities against targets;
• issuing garnishees;
• performing access without notice actions;
• agreeing to an enforceable undertaking under section 93AA of the Australian Securities and Investments Commission Act 2001;
• achieving convictions against targets for breaches of the Corporations Act 2001; and
• holding public examinations of targets and other persons of interest.

3.39 However, it remains too early to judge whether operations have achieved their desired strategic outcomes. In the period since the February 2015 inception of the Top Phoenix Targets Strategy only one operation has been completed (November 2018), meaning that there is a limited evidence base to assess the impact of operations. The ATO has also been unable to provide evidence that it is capturing lessons from operations so that future operations can be improved.⁷⁰ Given the innovative multi-agency approach adopted for Top Phoenix Target operations, and most operations are yet to run their course through to civil and criminal prosecution activities, the ATO should consider how it can effectively capture lessons learnt to inform future operations.

Has the Phoenix Taskforce established arrangements to adequately assess its effectiveness?

4.1 The Department of Finance’s Resource Management Guide 131, Developing Good Performance Information, notes that for cross-entity activities, performance information likely to be of most interest from an accountability and strategic perspective is whether the cross-entity common purpose is being achieved.⁷¹ Accordingly, to support performance measurement of cross-entity activities, it is important that there is a clearly expressed purpose that states the outcomes sought for clients, stakeholders and the public. There also needs to be a clear understanding of the relationship between purposes and activities.⁷² Good performance information will use both quantitative and qualitative measures. Effectiveness measurement also considers who has been affected by the activity, to what extent and whether this was intended or not.⁷³ Setting targets helps to define and demonstrate performance. This includes establishing baseline results, and using benchmarks and trends in performance from prior periods or activities.⁷⁴

Phoenix Taskforce Evaluation Framework

4.2 In 2015, PricewaterhouseCoopers was commissioned to develop an evaluation framework for the Inter-Agency Phoenix Taskforce. In developing the framework, PricewaterhouseCoopers consulted with key Inter-Agency Phoenix Taskforce members to determine the outcomes they sought to achieve, and to develop and refine performance measures. The framework report was finalised in December 2015, and first considered and endorsed (in principle) by the Phoenix Taskforce Steering Committee in September 2017. The Steering Committee noted that data sources for the framework were to be agreed at later meetings.

4.3 As discussed in Chapter 3, the Phoenix Taskforce Steering Committee also endorsed the ATO’s Phoenix Strategy in February 2018. The Phoenix Strategy includes an evaluation framework that is based on, but different to, the endorsed Evaluation Framework, with a revised program logic approach.⁷⁵ The Phoenix Strategy evaluation framework links to the ATO’s strategic objectives while the 2015 Evaluation Strategy refers to Taskforce objectives. Accordingly, the ANAO’s examination focused on the endorsed 2015 Evaluation Framework.

2015 Evaluation Framework

4.4 The 2015 Evaluation Framework has outcomes and measures aligned to the Phoenix Taskforce’s high-level treatments (output groups) of educate, engage and enforce (see Table 3.1), but does not align the outcomes to the purpose or goals of the Taskforce (outlined in Table 1.1). Instead of presenting the purposes and goals of the taskforce as the objectives, the program logic model describes the Taskforce objectives as:

Disrupt the business environment that allows and incentivises phoenix behaviour. This is achieved through the following:

• Detect (identify through data and intelligence) those who are at risk
• Deter (discourage by showing the consequences) unwanted behaviour
• Dealing with (penalise and remove from the business environment) perpetrators who cannot be deterred
• Deny (do not allow perpetrators to realise) the revenue benefits of phoenix behaviour

4.5 The model should show how inter-dependent activities contribute to an outcome for a purpose, or how a single activity contributes to a purpose. There is an opportunity for the Phoenix Taskforce to improve its performance measurement arrangements to align the Taskforce’s purposes and goals and the objectives defined in the Evaluation Framework. This may involve revising the purposes and goals of the Taskforce and/or the objectives.

4.6 The 2015 Evaluation Framework includes five outcomes, including the ‘ultimate’ outcome of a reduction in the incidence and impact of phoenix (see paragraph 3.5).⁷⁶ These outcomes are not in the Taskforce Charter, which is the primary governance document for the Phoenix Taskforce. The Taskforce should ensure alignment between purposes, goals and outcomes that are consistent in the Phoenix Charter and Evaluation Framework. In both documents, the Taskforce should ensure that its purpose and goals clearly state the outcomes the Taskforce seeks to achieve for clients, stakeholders and the public (including how things will be different when the need is met and for whom they will be different, and when will stakeholders know that a significant difference has been made, and what will the observed change be).

4.7 The Evaluation Framework is based on a program logic model that asserts it derives outcomes from the Taskforce’s need, objectives, inputs and outputs. The outcomes support the Taskforce to determine whether it achieved what it set out to do. For each outcome, the Evaluation Framework establishes measures, indicators and data sources. Table 4.1 provides an overview of the Evaluation Framework measures and indicators.⁷⁷ The Framework listed data requirements and sources but did not provide a baseline or target for any measure. The indicators are generally quantitative in nature with a focus on outputs.

4.8 Four of the 28 Taskforce Members interviewed in September and October 2018 reported contributing to the development of the performance measurement arrangements for the Taskforce. Some Taskforce Members raised concerns about some measures of effectiveness, particularly regarding the extent to which the Taskforce could reasonably draw a conclusion that its activities had deterred individuals who were considering phoenixing from undertaking illegal phoenix behaviour. Most Taskforce members also advised that their entity did not have entity-specific phoenix performance measurement arrangements.

Table 4.1: Evaluation framework outcomes, measures and indicators

Note: PRM population is phoenix risk model population.

Source: Phoenix Taskforce Evaluation Framework, December 2015.

Phoenix Taskforce evaluation

4.11 In July 2018, the ATO completed an evaluation of the effectiveness of the Phoenix Taskforce for the period July 2014 to June 2017 using the endorsed Evaluation Framework. The purpose of the evaluation was to assess the extent to which the interagency Phoenix Strategy had achieved its intent of reducing the incidence and impact of phoenix activities. The evaluation found that positive results had been achieved in certain areas of the strategy, which have had the desired effect on compliance behaviours, while a number of the Taskforce outcomes had not been met.

4.12 A total of 24 performance indicators were considered across the five outcomes for the Evaluation Framework.⁷⁸ Reported results for the 24 performance indicators were:

• eight (33 per cent) were met;
• eight (33 per cent) could not be analysed because data was not available. A further two performance indicators were assessed as being met, although one of the underlying data requirements was not available;
• one (four per cent) was inconclusive;
• one (four per cent) was partially met; and
• six (25 per cent) were not met.

4.13 A minimum of two performance indicators (and overall 40 to 50 per cent) for each of the five Outcomes were not met and/or not able to be analysed. The evaluation concluded that while a number of objectives had not been met it did not mean that the strategy has not been positive. The report considered measurement of nine performance indicators for Outcomes 4 and 5 were premature, but the evaluation was useful as it identified significant gaps in the data available to measure these indicators.

4.14 The report made nine recommendations aimed at improving the evaluation framework, data collection supporting the Framework, better understanding the cause and effect relationship for some indicators and achieving desired outcomes for the Taskforce.⁷⁹ Following the evaluation, in September 2018 the ATO proposed changes to nine performance indicators and/or the data sources for these indicators.

Quantifying the phoenix risk

4.15 To assist with the measurement of Outcome 5, the Phoenix Taskforce has sought to quantify the size of the phoenix problem. In December 2016, the Phoenix Taskforce Steering Committee agreed to consider different evaluation models with respect to quantifying the phoenix problem, and in July 2017 sought to agree on the methodology.⁸⁰ It was expected that this quantification model would be used at intervals by the Phoenix Taskforce to determine the success and effectiveness of the Taskforce over time. The model was finalised in 2018 and is available on the Phoenix Taskforce website as the report on the Economic Impact of Illegal Phoenix Activity.⁸¹ The report includes an estimate of the direct costs to business, employees and government (see paragraph 1.3 and paragraph 3.32) and economic impact of phoenix activity on the Australian Economy.⁸²

4.16 Table 4.2 provides the direct cost estimates (with low and high bounds) between 2012–13 and 2015–16. The table shows that direct costs to employees have consistently reduced, there has also been a reduction in direct costs to business, while costs to government have increased over the four years.

Table 4.2: Annual direct cost estimate of potential illegal phoenix activity

Source: ATO, Fair Work Ombudsman and ASIC, PricewaterhouseCoopers, The Economic Impact of Potential Illegal Phoenix Activity, 2018, p. 15.

Does the Phoenix Taskforce regularly monitor and report against performance indicators, baselines, targets and benchmarks?

4.17 In December 2016, the Phoenix Taskforce Steering Committee endorsed a proposal to provide quarterly updates for the Minister⁸³ in line with the Serious Financial Crime Taskforce quarterly reports to the Minister.⁸⁴ On 20 September 2017, the Steering Committee agreed to templates for a Phoenix Taskforce Steering Committee Performance Report linked to the quarterly meeting cycle for the Steering Committee, a six-monthly report to the Minister, and a performance report to be published on the Taskforce website.

Phoenix Taskforce Steering Committee quarterly report

4.18 As at November 2018, a Phoenix Taskforce Steering Committee report had been prepared five times — from Quarter 1 2017–18 to Quarter 1 2018–19. The reports provided detailed updates and progress across 14 areas, shown in Table 4.3. The reports included various statistics⁸⁵ and qualitative descriptions of progress. All of the ATO’s phoenix activities were included in the reports, but not all phoenix activities of other member entities. The reports rarely provided trends or achievement against targets or expectations.

Table 4.3: Phoenix Taskforce Steering Committee reporting areas

Source: ANAO summary of the nature of reporting by topic in the Phoenix Taskforce Steering Committee quarterly reports.

4.19 An October 2017 ATO internal audit, Phoenix Strategy Implementation, recommended that the ATO develop and implement summary progress reporting around the implementation of the ATO Phoenix Strategic Approach 2015–2020 and the Phoenix Strategic Work Program 2017–18 (highlighting achievements from the strategies and any impediments). In response, the ATO committed to implementing regular reporting regarding the performance of the Phoenix Taskforce that is aligned to the Evaluation Framework, and noted the Phoenix Taskforce Steering Committee would have a role in overseeing the reporting by December 2017. The Phoenix Taskforce Steering Committee quarterly report does not include reporting against performance indicators from the Evaluation Framework. The first two quarterly reports included an effectiveness reporting area listing eight measures from the Evaluation Framework that was marked as underdevelopment. The effectiveness reporting area does not appear in later quarterly reports.

4.20 The Phoenix Taskforce Steering Committee Report includes a key results section. The results reported across the five quarterly reports are presented in Table 4.4.

4.21 The reports did include trends on progress against commitments for liabilities raised and cash collected for Serious Financial Crime Taskforce and ATO Phoenix matters. Table 4.5 shows that the ATO has exceeded annual planned levels for raising liabilities and collecting cash. Liabilities raised and cash collected are also attributed to the Phoenix Early Intervention Strategy, Labour Hire — Meat Processing activities, Property and Construction activities and Promoter and Facilitator activities.

4.22 Six of the 28 Taskforce Members interviewed in September and October 2018 reported contributing to the performance reporting for the Taskforce. Member agencies generally reported that they did not have phoenix-specific reporting at an agency level. The Steering Committee anticipates that the increase in operations is considered to be an opportunity for entities other than Steering Committee members to regularly contribute to the Taskforce Quarterly reports, noting that up to 17 entities are involved in Taskforce operations and may in the future be able to report successes linked to these operations.

4.23 The ATO also has a range of internal reports provided to a number of committees and senior managers that include phoenix matters, but not a consolidated phoenix report. This reporting reflects many of the areas included in Steering Committee reports, but has a limited focus. Reporting is not based on the Evaluation Framework.

Minister’s quarterly report and ATO website report

4.24 Consistent with the Steering Committee quarterly report, the Minister’s quarterly report was introduced for the 2017–18 financial year. Information from the Steering Committee quarterly report forms the basis of the Minister’s quarterly report, although the focus of the Minister’s report has changed over time and figures reported in the Steering Committee Report and Minister’s report are sometimes inconsistent. The Ministers report includes: context for the Taskforce; key results; highlights; and reports against Outcomes 1 to 3 of the evaluation framework without reporting on performance indicators. Outcomes reporting includes some data that would support assessment of performance using performance indicators. The outcomes section also includes reporting against the Top Phoenix Targets project. The reporting is activity-based and has many statistics.

4.25 Some key results from the Minister’s Report are provided on the Phoenix Taskforce website.⁸⁶ The Taskforce’s most recent quarterly report to Government (April to June 2018)⁸⁷ included the following outcomes:

• a criminal conviction of a director resulting in two months imprisonment; the disqualification of a director for five years;
• 15 active operations (involving: 1006 insolvency events; 11 bankrupt individuals; $799 million owed to creditors; $430.3 million owed to government; and promoters and facilitators of phoenix behaviour);
• the introduction of real-time information sharing resulting in a joint agency operation being considered for a group displaying suspected illegal phoenix behaviour; and
• 282 cross-agency disclosures as intelligence and operational working groups share information on the top phoenix targets for the quarter.

4.26 The Phoenix Taskforce website reported results achieved in 2017–18, including: 340 audits and reviews conducted; $275 million raised in liabilities, $190 million collected and returned to the community; eight criminal convictions and prosecutions; and 43 directors banned and disqualified from acting. The ATO advised that over the period 1 July 2018 to 31 December 2018, the ATO raised liabilities of over $160 million and returned $54 million in cash to the community and completed around 230 audits and reviews relating to illegal phoenix activity.

4.27 There is little reporting either internally or publicly of the totality of member activities to combat illegal phoenix activity, as the focus to date has been on Steering Committee activities. Consolidating the extent of Taskforce members’ efforts and successes overall in combatting illegal phoenix activity could provide a better understanding of overall effectiveness and a greater deterrence effect, and inform future compliance strategies and activities.

Appendix 1 Entity response

Australian Taxation Office

 

 

Australian Securities and Investments Commission

 

 

 

 

Department of Jobs and Small Business

 

 

Department of the Treasury

 

 

Appendix 2 Taskforce member entities

1. The Phoenix Taskforce Charter (September 2017) requires the ATO to maintain a register of members. The following information is captured in the register. The ATO also maintains details of gatekeepers and authorised officers for each entity in the register.

Note a: Serious Financial Crime Taskforce entities include the Australian Taxation Office, Australian Criminal Intelligence Commission, Australian Federal Police, Attorney-General’s Department, Australian Transaction Reports and Analysis Centre, Australian Securities and Investments Commission, Commonwealth Director of Public Prosecutions and Australian Border Force.

Source: ATO Member Entity Register and related documents.

Appendix 3 Phoenix Taskforce disclosure request and approval processes

 

 

Source: Adapted from ATO Information Disclosure Team and Phoenix Taskforce disclosure guidance.

Appendix 4 Law reform proposal 2017 and status of individual recommendations acceptance and implementation

Note a: To provide a director with access to an independent registered liquidator who can provide advice on the options available to the director to deal with the company’s financial position.

Source: Treasury and ATO documents.