ATO Raids

Roasting the Phoenix

The Phoenix according to Greek and Roman mythology is a bird that lives for centuries and then is consumed by fire and rises again. It was a benign mythology symbolising concepts such as renewal and resurrection.

The Australian Government has a different and more malign conception of a Phoenix. Our article in our Autumn Newsletter described this.^[1] The “Phoenix” activity that the Government is concerned with is described in the ATO Phoenix Fact Sheet:

Fraudulent phoenix activity occurs where a company deliberately liquidates to avoid paying creditors, taxes and employee entitlements. They transfer the assets to a new company and continue operating the same or a similar business with the same ownership.^[2]

The ATO emphasises its view that this activity is not just resulting in tax avoidance, but results in contractors, creditors and employees losing out.^[3] For those old enough to remember, the “Phoenix” could be the rebirth from fire of the bottom of the harbor schemes common in the 1970s. In its 1987 annual report, the ATO reportedly asserted that 6,688 companies had been stripped of their assets and “sent to the bottom of the harbor” leaving shell companies unable to pay taxes or creditors.^[4]

Turning up the heat

The ATO has since 2015 been turning up the heat on suspected Phoenix activity, but it is not alone. A Phoenix Taskforce has been established with 31 Federal, State and Territory Government agencies, including the ATO and ASIC.^[5]

ATO activity, beyond normal audit activity, has been increasing. The ATO reports that:

• in 2015 surprise visits were made to “over a dozen” sites across Sydney^[6];
• 80 officers conducted access visits without notice on two sites in Victoria in April 2017^[7]; and
• on 1 August 2018 11 sites in Victoria around Shepparton were accessed by more than 250 ATO officers supported by Victorian Police^[8].

What to do if the ATO “visits”

It is something of an understatement to say that the ATO has extremely wide powers. These were the subject of an investigation by Four Corners and Fairfax Media which ABC News reported on saying that the ATO:

…has extraordinary powers more akin to police and law enforcement agencies. And when it makes mistakes, it can destroy small businesses and livelihoods.^[9]

The source of the ATO powers is mainly in Sections 353-10 and 353-15 of the Taxation Administration Act.^[10] In summary, the powers in Section 353-10(1) are, for the purpose of the administration or operation of a taxation law, to:

• give the Commissioner any information that the Commissioner requires;
• attend and give evidence before the Commissioner; and
• produce to the Commissioner any documents in your custody or control.

Under Section 353-15(1) for the purposes of a taxation law, the Commissioner, or an individual authorised by the Commissioner for the purposes of the section:

• may at all reasonable times enter and remain on any premises;
• is entitled to full and free access at all reasonable times to any documents, goods or other property;
• may inspect, examine and make copies or take extracts from any documents; and
• may inspect, examine, count, measure, weigh, gauge, test or analyse any goods or other property and take samples.

Section 353-15(2) does provide that an individual authorised by the Commissioner may not enter or remain on premises if the occupier has requested proof of authority and the individual does not produce the authority signed by the Commissioner.

As may be expected, non-compliance with these requirements may be an offence.

The ATO does have guidelines as to how it will exercise its wide access powers.^[11] The ATO states that:

In most cases, we only use our access powers if we cannot obtain the documents or information we require under a cooperative approach.

There is also a Taxpayers’ Charter.^[12]

So, if officers of the ATO do arrive unannounced on your doorstep, with or without State or Federal Police, some suggestions for dealing with the situation are:

• keep your cool and cooperate (offences may apply if you do not);
• ask for production of authority for each person in attendance. Make a note of these authorities (the ATO will not allow copies, it advises);
• ask if entry is pursuant to a search warrant. If the entry is pursuant to a search warrant, you should be provided with a copy;
• ask for time to consult your lawyer, and do so as quickly as possible (even if you are a lawyer, you may wish to obtain some more expert assistance);
• provide the authorised ATO personnel with a room or suitable space and bring requested documents and files to them;
• if there is any possibility that legal professional privilege may relate to documents, claim this and require that the documents to which the claim may relate are kept secure until the claim for legal professional privilege can be determined;
• determine if the Accountants Concession should be claimed. This is a special administrative concession that is granted by the ATO; and^[13]
• you may wish to record the visit and conversations, either by audio or video recording. This is a complex topic depending on relevant State or Territory legislation but may be possible. Before doing so, this is definitely something that you should obtain legal advice on.

There is no doubt that Phoenix activity as described by the Government can affect more than just the collection of taxation. The Commissioner of Taxation, however, has powers that are well beyond those of other parties affected by such activity.