Taxation Law - Liquidation of Entities - Tax Consequences

For a number of years now both ASIC and the ATO have been clamping down on arrangements which lead to the liquidation of entities, particularly companies which continue to avoid their liabilities including the payment of tax. Where business and other assets are transferred to a new entity to avoid liabilities in the old entity these schemes or arrangements are referred to as ‘phoenix arrangements’. Their effect is to defeat creditors from obtaining payment for outstanding debts and liabilities including the ATO. Obviously something had to be done to overcome these schemes or arrangements by taxpayers exhibiting any/all of the following features:

1. Utilisation of various entities as part of a tax avoidance scheme.
2. Engaging in transaction(s) with the help of another entity to avoid their tax liability by liquidation of one or more entities.
3. The arrangement defeating creditors including the Tax Office.
4. The new entity(s) carries on the business and utilises the assets formerly owned by the original entity.
5. Distributions may be received by the taxpayer or its associates or affiliates etc.

Civil and Criminal Consequences

1. The Tax Office will closely examine the circumstances of any such arrangement(s) to ascertain whether they amount to a tax avoidance scheme which is a sham under the general law. 
2. To determine whether the correct taxpayer has been assessed in respect of their taxation liability(s) arising from the scheme including any capital gains tax liability.
3. To ascertain whether Part IVA applies to cancel any tax benefits obtained under the scheme involving liquidation of the original entity.
4. To ascertain whether any action should be taken against any tax agent or other professional adviser involved in the arrangement.

Civil Consequences

Any such professional involved in the promotion of any such scheme or arrangement will be subject to the promoter penalty laws recently enacted to deter these activities. The promotion of these types of arrangements are serious and where detected by the ATO they will be referred to the Commonwealth Director of Public Prosecutions, ASIC or to any professional body for action including the loss of professional accreditation. In the end the taxpayer will be identified and assessed for primary tax, penalties and interest. Where taxpayers participate in these types of schemes of arrangement they are involved at the least in either fraud or evasion, allowing the ATO to fully investigate their taxation affairs without restriction.

Criminal Consequences

Where entities are liquidated to defeat the payment of tax they will attract criminal sanctions under the Commonwealth Criminal Code or under the Crimes (Taxation Offences) Act 1980 including penalties of $1.1M and/or 10 years imprisonment. Heavy penalties apply to either individual or bodies corporate who act as promoters of taxation exploitation schemes under Division 290 of Schedule 1 of the Taxation Administration Act 1953.

Any taxpayer is at liberty to liquidate any entity at any time, however, if the dominant purpose is to avoid a taxation or other liability then the effects can be extremely harsh involving criminal sanctions and penalties. Before you decide on this course of action, particularly in the current economic downturn contact LAC Lawyers.