Advisers push for stronger recovery mechanisms to deter phoenix activity

Financial advisers are looking to the government to provide more recovery mechanisms from phoenixing businesses, hoping that insolvency regime changes will reduce the financial burden that financial advisers are incurring from the Compensation Scheme of Last Resort (CSLR).

The risk of illegal phoenixing is expected to rise during the three-year period provided for discretionary trusts to restructure into companies under the government's proposed discretionary trust tax legislation.

General Manager of Policy, Advocacy & Standards at the Financial Advice Association Australia, Philip Anderson, told Accounting Times that previous high-profile insolvency cases highlight the importance of the government introducing stronger recovery mechanisms to address the $190.3 million in costs CSLR would impose on the financial advice sector in 2026–27.

“If people think that they can get away with phoenixing, then they're going to try it; if there are measures to prevent it, then they're much less likely to try it … we want to see mechanisms in place to seek recovery of funds where there have been deliberate steps to deprive creditors of the value of the entities,” Anderson said.

Anderson called for changes to be made by the government, either in narrowing CSLR, or a broad reform of the insolvency regime to curtail the CSLR burden that financial advisers face.

“If any changes are made to make it easier for people to exit businesses. You need to be very careful that it doesn't increase the risk of phoenixing,” he warned.

“It is also important that liquidators are empowered to pursue phoenixing activity and that those who are responsible are held to account.”

“We want to put a spotlight on all that sort of [phoenixing] activity, and we want, we want people to understand that, should they choose to do anything like that, there is a high prospect that it will be identified and they'll be brought to account for it.”

He noted that the government is actively consulting on the insolvency regime.

“I think that's a positive sign that they're looking at this issue and they are considering what changes to the regime might better allow recovery of money from situations that appear to reflect a phoenixing situation,” he said.

While it is yet to be known whether the government will make a standalone change for the CSLR or a broader change to the insolvency regime, a more robust recovery mechanism will be a major win for financial advisers, Anderson said.

“I don't think that we have a particular preference on how this issue is going to be solved. I think the important thing is it's going to be solved”

“[Reducing phoenixing activity is] one of the ways to reduce the cost of the CSLR going forward, so it's certainly something that we're happy to support.”

“If [the government is] going to push forward with this discretionary trust minimum tax … whenever you've got large-scale restructuring, then there is [always] the possibility of some of it contributing to phoenixing-type activity.”