Everyone knows who the crooks are,” says the veteran liquidator. “The problem is they never get caught.” The liquidator, speaking anonymously to talk candidly, is discussing tax fraud and phoenixing – the act of liquidating and rebirthing companies to avoid tax debts. On conservative estimates, this costs the economy $5 billion every year.
Despite decades of debate, reviews and legal reforms, the avoidance has never seemed so blatant.
AFR Weekend can reveal that a liquidator captured on wiretaps in the $105 million Plutus tax fraud and sanctioned for three years because of serious and repeated failures to investigate conduct in liquidations has recently been appointed head of insolvency operations at a major firm.
Meanwhile, the Australian Taxation Office has opted not to fund liquidator investigations into what its own agents suspect was a $180 million tax fraud over 15 years involving major construction contractor Dalma Formwork – potentially the biggest corporate fraud in the country’s history.
Michael Murray, a research fellow with the University of Sydney who has co-written books on insolvency law, says a “light touch on scrutiny and regulation” of phoenixing appears to have contributed to the problem.
“At the moment, it seems to me if you want to phoenix, you can do it undercover. You might get caught out but it’s likely you won’t.”
University of Sydney corporate law professor Jason Harris is a strong critic of the Australian Securities and Investment Commission’s lack of enforcement of phoenixing laws and says its actions in cracking down on individual perpetrators have been “nowhere near enough”.
“Each year, they only seem to run a small handful of cases – I mean four or five cases a year,” he says. “It’s just a drop in the ocean each year because there are thousands and thousands of companies that are doing this.”
According to the ATO’s latest assessment from last year, the economic impact of illegal phoenix activity is $4.89 billion a year. That included an annual cost of $3.3 billion to unpaid creditors and $1.5 billion to the government.
In the 10 years since the Commonwealth set up its multi-agency phoenix taskforce to tackle the problem, the ATO says it has received more than 17,000 tip-offs about suspected phoenix activity.
Soft deterrence
Yet, only 27 criminal cases involving such activity have been successfully prosecuted. That’s an average of just two to three a year.
Most of those were from the $105 million Plutus Payroll tax fraud in 2014-17 and the $10 million George Alex labour-hire tax fraud from 2018-20 – the latter scam started soon after the arrests in the former, suggesting how soft deterrence is in this area.
The veteran liquidator tells AFR Weekend he believes regulators “want the easy pickings” and some of the large sophisticated frauds are just too hard to prove and likely to face strong resistance.
The typical phoenix scam works like this: fraudsters pay their PAYG taxes and wages to a supposedly separate labour-hire firm, manned by a dummy director. That firm siphons off and pockets the tax for a year or two and stalls the ATO when it comes chasing. The firm then appoints a friendly liquidator who closes down the company because no creditors will fund an investigation. Meanwhile, another labour-hire firm has been set up.
“It seems like easy money, right?” Harris says on the preponderance of the scams.
“Money for tax, and then you just don’t pay the tax, and then when the ATO finally comes around to chasing you, delay, delay, delay. And then liquidation. Make sure there’s no money, no records, pay off a liquidator five or 10 grand. Rinse, repeat.”
Liquidators say fraudsters have also found ways to complicate traditional phoenix laws that prevent businesses from offloading assets to a new company for little or no value.
“What they do is refer it [the assets] off to a sleazy or friendly valuer and use the low market value – and then they just cut a cheque and send an invoice,” the liquidator says.
“The valuer only values the plant and equipment – they don’t know the goodwill of the business, the client contracts, the customers. They strip the goodwill out. Then the owners transfer their customers to the new company for nothing.”
Asked how successful it is in fighting phoenixing, an ATO spokesman says it has completed 13,000 compliance cases over the past decade, raising $2.5 billion in liabilities and returning $1.1 billion in cash.
“Politicians love to say there’s a phoenixing problem [so] let’s pass a law and we’ll fix it.”
That sounds impressive, but the cash recovery is just 7 per cent of the $15 billion the ATO estimates governments have lost from phoenixing since 2014.
More than 100 directors were also disqualified from managing companies, 27 in the last year alone.
An ASIC spokesman says director disqualification is “a key tool used in helping combat illegal phoenixing”.
However, Harris notes that banning directors will not combat sophisticated phoenixing, which relies on straw directors, often drawn from visa workers or the unemployed.
“My impression of that is, it’s padding their statistics for Senate estimates,” he says.
The problem may be even bigger than the usual statistics around insolvencies suggest, Harris adds.
From 2016 to 2021, ASIC revealed that it had about 50,000 default company deregistrations a year, which in 2020-21 was 13 times the number of liquidations at 3941. A deregistration occurs when ASIC strikes off a business for failing to respond or pay fees.
“I think the problems that we’re seeing with phoenixing and illegal activities that are caught through liquidation, that’s the tip of the iceberg. Because no one’s looking at the deregistered companies,” Harris says.
“So if you’re a hardcore criminal, there are various ways to quietly shuffle the companies off this earth and no one ever looks at it.”
Harris says ASIC and the ATO need to put more resources into targeting the lawyers, accountants and insolvency advisers - “because that’s the network that supports this phoenix activity on an industry-wide scale”.
“You start throwing accountants and lawyers in prison, the message will soon get out there. They can’t get away with it.”
Meanwhile, more reviews are under way. The Productivity Commission’s proposed competition reforms at the end of last year included preventing phoenixing in the building sector.
Last week, the Department of Employment and Workplace Relations started reviewing phoenixing powers to ensure workers were not left without entitlements, and it noted the problem of “friendly liquidators”.
Treasury, which is expected to announce new changes on phoenixing as the election approaches, will soon start reviewing illegal phoenixing laws that were introduced in 2020 and which have so far not been used.
Murray says the answer is not more laws or regulation.
“Politicians love to say there’s a phoenixing problem [so] let’s pass a law and we’ll fix it. But it’s been quite a few years and nothing’s happened [with the new powers],” he says.
Recently, Harris, who is also deputy co-chairman of the Law Council of NSW’s insolvency committee, which advises Treasury, has been advocating for the government to set up a specialist insolvency regulator.
“If we had a dedicated insolvency regulator and enforcement agency like they do in many other countries, then maybe we could have a bit more accountability for what the regulators are doing,” he says.
So far the idea hasn’t got traction. “There’s no political appetite for it.
“But there’s that old saying, If you always do what you’ve always done, you’ll always get what you always had.”
What family offices are investing in
This booming sector likes to keep a low profile. But its secrets aren’t always far from the surface.
Associate
Australia is in the middle of a boom in the relatively secretive financial creature that is the family office. The wealthiest Australians are getting richer – about 1.8 million have $US1 million ($1.5 million) or more, according to Credit Suisse – and more and more of them are deciding to set up financial vehicles to manage their wealth.
An estimated 2000 family or private offices are now operating in Australia, research from KPMG has found, a 150 per cent increase over the past 10 years. Sydney alone is home to 198 people with more than $US100 million in investible assets, and 30 billionaires, according to Henley &Partners, a firm focused on assisting the wealthy with ideal geographical locations for their investments.
What they invest in
Australia’s wealthy families are known for being heavy in real estate, with businessmen like Frank Lowy and property developer Lang Walker having made their fortune on the back of these investments. But many family offices led by the heirs of those who have made money in property are branching out into other sectors to diversify their holdings.
The children of the late John Saunders, who founded Westfield with Frank Lowy, have cultivated a strong private lending business within their family office Terrace Tower Group.
It’s a popular theme internationally for wealthy families, who are not under pressure to do deals and can be picky about which borrowers they lend to. Dell founder Michael Dell last year backed 5C Investment Partners, a private credit investment firm recently set up by former Goldman Sachs employees.
Some Australian family offices are keen to back progressive or climate change causes, and have gone big on environmental or social focused investments.
Mike Cannon-Brookes’ private Grok Ventures is singularly channelling funds towards green investments. Lisa Miller, a former Canva executive and wife of Canva co-founder Cameron Adams, leads private investment firm Wedgetail which aims to use its funds to “conserve and restore biodiversity through sustainable investment”.
The best-known family offices
The single family office model is probably how family offices are best known. They likely have a dedicated full-time team that just looks after the one family with a bricks-and-mortar presence.
Single family offices typically employ full-time accountants and other professionals, plus perhaps offering formal education for the next generation. In some cases, younger generations attend seminars on how to manage finances and make investment decisions.
These offices can then split up as families change shape or have different priorities. “As wealth transitions to successive generations … branches of family might become more independent of each other and their needs may diverge,” according to Chris Graves, an associate professor at the University of Adelaide Business School.
The Fairfax family has offices for different branches of the family, including Cambooya and Marinya Capital which characterises itself as a global concentrated long equity investor, which has backed companies like Canva and Guzman y Gomez.
Running an entirely separate entity, especially if the principal is still in the business which brought them their wealth in the first place, can be complicated. Loyal and trusted staff are key.
Billionaire Atlassian co-founder Mike Cannon-Brookes recently moved to injunct a senior figure at his private companies and prevent him from disclosing or publishing confidential information.
But a lot of family offices can be more basic. One of the reasons might be because despite the size of a family’s investible capital, their investing strategy might be simple. A family business might use its excess capital to invest in companies in a similar industry or in property. So it might have staff who already sit inside the family business to run those investments, rather than setting up a whole new operation.
But things can get more complicated, especially if a family has a major “liquidity event”, or comes into a larger sum if someone dies or once a business is sold.
“Most people start off with an accountant … but you need broader advice when your wealth multiplies, such as investment advice,” one client of multi-family office operator Mutual Trust said in an interview for research into Australian family offices. This might mean a need to change their model to include more dedicated outsiders.
Outsourced professionals
Families can also opt to set up a “virtual family office” model where they employ professionals who work at service providers on a part-time or contract basis.
One lawyer working for wealthy families on that basis said families faced new issues as their wealth accumulated, and could get caught out. “I have dealt with a number of blackmail attempts,” they said, adding that part of their role also includes counsellor.
Andrew Hagger, a former Andrew Forrest lieutenant, and Guy Debelle, the former deputy governor of the Reserve Bank, recently set up Famille Capital, a new advisory firm for Australia’s richest families.
Alex Nikov, the firm’s managing director, told The Australian Financial Review how some families were using their capital in a more sophisticated and sometimes activist way, meaning those serving these families needed to have rich experience in financial markets.
Multifamily offices are another choice, with a full service of offerings across investments, tax, and philanthropy. In this case, third-party companies with their own professionals look after multiple families.
The best known of these is the Myer and Baillieu family’s wealth firm, which among many services offers family succession education. Succession is a hot topic for the rich. Australia is in the midst of a generational wealth transfer worth trillions. Of the 200 wealthiest Australians on the Rich List, 45 are over 80 and control a collective $136.1 billion, which will be inherited by 150 children.
For those wanting a trial run at investing like a family office, some of these firms take on outside money to grow their funds under management.
Victor Smorgon Group, led by Peter Edwards, is one of those. “I think it’s traditional for family businesses to bring in family and friends,” he told a forum last year.
