Directors of companies engaged in work on building sites associated with Commonwealth Games facilities who transfer assets between companies in order to avoid debts have been put on notice as the tax office seeks to stamp out the ugly practice of phoenix activity.

In a recent announcement, Australian Taxation Office Deputy Commissioner Michael Cranston said the ATO would review all contractors working on the 2018 Commonwealth Games construction projects, and had already looked into 55 contractors involved in the building of the Southport Aquatic Centre.

In a statement, Cranston said the tax office will have a visible presence on site as it looks into the affairs of all contractors working on Games sites.

“Whilst most businesses do the right thing, the ATO has found that building and construction is one industry where we see too many phoenix businesses,” Cranston said. “Given the large number of contractors working on Commonwealth Games construction sites, it’s a good opportunity for us to identify those who might be trying to rort the system.”

Widely considered an unethical business practice, phoenix activity occurs where a company purposefully liquidates to avoid paying creditors, taxes and employee entitlements.

The perpetrators transfer the assets to a new entity and continue operating the same or a similar business with the same ownership – leaving debts in the old company with no assets to pay them and thus leaving workers, suppliers and taxpayers out of pocket.

According to a PricewaterhouseCoopers report in 2012, such practices cost the Australian economy $3.2 billion each year, with honest businesses alone suffering losses worth $2 billion in unpaid debts and the non-supply of purchased goods and services.

Cranston says the ATO is involved in a number of cross-agency task forces focused upon stamping out the problem, and that serious matters of phoenixing can result in criminal prosecution.

The ATO says signs a company may be involved in phoenixing activity include undercutting of competitors, workers being pressured to take leave or having their employment status changed from permanent to casual and underpayment or non-payment of wages and superannuation. Other signs include the non-replacement of equipment, machinery and uniforms (even as needed) and company owners or directors enjoying a lifestyle beyond what their income suggests would be realistic.

Contractors can confirm a business they are working with is registered and that its ABN is valid by checking with the Australian Business register, while credit checks and references can help honest businesses steer clear of potential phoenix operators.

The announcement comes amid a Senate inquiry into insolvency with the Australian construction sector, which includes the issue of phoenix companies and how to prevent their spread.

A report in relation to that inquiry is expected to be handed down in early December.