ATO warns against liquidation to avoid tax
The Commissioner of Taxation has released a Taxpayer Alert in relation to the use of liquidation to avoid payment of taxation. Taxpayer Alerts are routinely issued by the Australia Taxation Office and provide a summary of significant new and emerging higher risk tax planning issues that are under risk assessment.
Taxpayer Alert 2008/16 describes arrangements where taxpayers involved in a previous tax avoidance scheme enter into an arrangement to avoid the payment of the tax liability rising from that scheme by liquidating entities. These arrangements include Phoenix arrangements where the business and assets are transferred to a new entity and then the existing entity is liquidated. This has the effect of defeating creditors of the original entity including the Tax Office. The ATO has become increasingly concerned with avoidance schemes that
involve the following features:
Separate entities. A taxpayer is involved in a tax avoidance scheme that involves the creation or utilisation of various entities.
Attempts to legitimise transactions. In order to avoid the consequences arising from outstanding tax debts, taxpayers have used the services of another entity – such as a tax agent, solicitor, a business recovery consultant, insolvency administrator or a liquidator – to engage in transactions that lead to liquidation of one or more of the entities.
Distribution of assets. These transactions generally result in a transfer of assets to different parties, which may include the taxpayer or their associates.
The effect of these strategies is to defeat creditors including the ATO. The taxation liability remains, but due to the liquidation there is an inability to pay. In Phoenix arrangements a new entity is established to continue the activities of the original business. The ATO views these activities very seriously. Liquidating an entity as a means of avoiding a tax liability can attract criminal sanctions, resulting in significant penalties and may also be referred to the Australian Securities and Investment Commission.