The Government has introduced a new director ID regime with the aim of preventing the use of false and fraudulent director identities and to reduce unlawful activity, such as phoenix activity. All directors who are subject to the rules will apply for a director ID once and will keep this ID forever, regardless of whether they change companies, stop being a director or move overseas.
The ATO and Australian Business Services Registry (ABSR) have released new information on the new director ID requirements, indicating that individuals will be able to apply for a director ID from November 2021.
While tax and BAS agents can potentially assist clients in determining whether they need to apply for a director ID, they cannot apply for a director ID on behalf of a client.
How to apply
There are two stages to the application process:
- Verifying the director’s identify
- Linking the director to the business’s ABN
In most cases directors will apply online through the ABSR using myGovID. myGovID is an identification verification app.
For clients who cannot obtain a myGovID then the best way to apply depends on their situation.
- Individual has a TFN – If the individual has an Australian TFN then they can apply by phone.
- Individual does not have a TFN. The individual will need to apply with a paper form (available to download from November 2021) and will need to provide certified copies of documents to verify their identity.
Foreign directors will need to apply using the paper form and have their primary and secondary identification documents verified by either a notary publics, or by an Australian embassy, high commission or consulate, including consulates headed by Austrade honorary consuls.
The individual’s myGovID will need to be linked to the business’s ABN through the Relationship Authorisation Manager (RAM). RAM will require one person acting on behalf of the business to act as the principal authority that will enable other directors to link to the ABN. RAM allows the director to act on behalf of a business online when the business is linked to their myGovID.
The Directors details will need to match the information held by ASIC.
Who needs to apply?
Individuals will need to obtain a director ID if they are a director or eligible officer of any of the following entities:
- A company;
- An Aboriginal and Torres Strait Islander corporation;
- A corporate trustee, for example, of a self-managed super fund;
- A charity or not-for-profit organisation that is a company or Aboriginal and Torres Strait Islander corporation;
- A registered Australian body, for example, an incorporated association that is registered with the Australian Securities and Investments Commission (ASIC) and trades outside the state or territory in which it is incorporated;
- A foreign company registered with ASIC and carrying on business in Australia (regardless of where the individual lives).
Individuals will not need a director ID if they are running a business as a sole trader or partnership.
When an individual must apply for a director ID depends on when the individual becomes a director:
|Date you become a director||Date you must apply|
|On or before 31 October 2021||By 30 November 2022|
|Between 1 November 2021 and 4 April 2022||Within 28 days of appointment|
|From 5 April 2022||Before appointment|
There are different timing requirements for directors of Aboriginal and Torres Strait Islander corporations.
- Preparing for your director ID
- Who needs to apply and when
- Verifying your identify – document requirements
Why a director ID?
Under the new regime, all directors will need to have their identity confirmed when they consent to being a director, so no more Elvis Presley unless your name really is Elvis Presley. You will then keep this number permanently, even if you cease to be a director – the number will not be issued to another person. The result is an ID system that traces a director’s relationships across companies, enabling better tracking of directors of failed companies and prevents the use of fictitious identities.
The target is illegal phoenixing. Phoenixing is when directors transfer the assets of an existing company to a new company without paying full value, leaving the debts with the old company. Once the assets have been transferred, the old company is liquidated leaving creditors out of pocket. Phoenixing has a ripple effect in the community and is estimated to cost between $2.9 billion and $5.1 billion annually. The real face of the impact is to the unpaid creditors – mostly customers and contractors, unpaid employee entitlements, and the broader cost through unpaid taxes.
Once the assets are transferred to a new company, the directors then continue to operate the business in a new entity. They just set aside the problems and start again with the benefit of the good parts of their old company as a foundation.
Who will need a director ID?
The DIN is very broad and introduces the concept of an ‘eligible officer’. An eligible officer is a director who:
- is appointed to the position of director, or is appointed to the position of an alternate director and is acting in that capacity (regardless of the name that is given to that position); or
- any other officer of the registered body who is an officer of a kind prescribed by the regulations.
The definition picks up the concept of ‘shadow directors’ who act in the capacity of directors through influence and control but are not directors by title. That is, its feasible that someone who is not a director but is seen to be making decisions on behalf of the company can be held to account.
An eligible officer is a director of a:
- registered foreign company
- registered Australian body under the Corporations Act such as an association or a charity, or
- an Aboriginal and Torres Strait Islander corporation (which are registered under the CATSI Act).
When the system opens, directors will need to apply for an ID through the Australian Business Register system through their myGov account. If you do not have a myGov account, it would be a good idea to create an account and become familiar with how it works. Your myGov account creates your digital credentials to verify who you are.
When you register, you will need to declare that the information you have provided is true and correct, you are or will be an eligible officer within 12 months, and you do not have an existing ID (or applied for one).
Existing directors will have until 30 November 2022 to acquire a DIN (30 November 2023 for directors of corporations under CATSI). For the first year of the program, new directors will have 28 days to apply for a DIN from the time of their appointment. From the first year onwards, you will need to have a DIN prior to being appointed as a director.
Unlike the existing system that merely registers information, the new regime will verify a director’s information and may utilise other sources of information such as your driver’s license and/or link to your client record held by the ATO.
The problem of directors in name only
The new regime will not overcome one problem area – where naive participants are encouraged to become directors in name only such as elderly parents, or a spouse. That is, the identity of that person is legitimate but their role as a director is merely window dressing and they do not fulfil the role as active participants – a situation that is not uncommon in family groups.
It’s important that anyone agreeing to be a director understands the implications. Being a director is not just a title; it is a responsibility. At a financial level, directors are responsible for ensuring that the company does not trade while insolvent. The by-product of this is that the directors may be held personally liable for the debt incurred. The director penalty regime has also been tightened up in recent years to ensure that directors are personally liable for PAYG withholding, net GST and superannuation guarantee charge liability if the company fails to meet its obligations by the due date. For many small businesses, the directors are also often personally responsible for company loans secured against property such as the family home.
Failing to perform your duties as a director is a criminal offence with fines of up to $200,000 and five years in prison.
Ignorance is not a legal defence. Don’t sign anything unless you understand the consequences.
Better monitoring and bigger teeth for ASIC
The introduction of a structured director verification system comes with greater controls and influence by the regulators to enforce the law with civil penalties of up to $200,000 in situations which include:
- Failure to register within the relevant timeframes
- Applying for multiple DINs
- Misrepresenting a DIN, and
- Accessorial liability where someone seeks to pervert the system
The failure to register when required is a strict liability and the regulator does not have to prove fault, they will simply issue an infringement notice.