24 Sep Director Identification Numbers
Illegal phoenix activity is a process whereby directors of a company transfer an ongoing business and assets to another entity and then leave the old company to be liquidated. A report commissioned by the Australian Taxation Office (ATO), Australian Securities and Investments Commission (ASIC) and the Fair Work Ombudsman in July 2018 estimated that the annual cost to the economy of illegal phoenix activity was between $2.85 and $5.13 billion dollars.
Regulators have long sought to target illegal phoenix activity. The Australian Government has implemented a raft of changes to the Corporations Act 2001 (Act) to better equip regulators and liquidators to deal with such activity. One such change was included in the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 and will require all company directors to have a Director Identification Number (DIN).
Currently a person may have multiple registrations as a director using different combinations of their given name(s)/alias, date of birth and/or place of birth. Multiple registrations make it difficult for regulators and liquidators to identify illegal phoenix activity or whether banned directors are still managing corporations.
Entities to Which DIN Applies
The DIN requirements will apply to all entities required to be registered pursuant to the:
- Act; and
- Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI).
Directors of CATSI corporations have separate obligations to apply for and hold a DIN. For the purposes of this article, I will be focusing on the Act.
The DIN application process and its ongoing administration is controlled by the ATO.
Who is Required to Hold a DIN
Subject to the transitional arrangements, a DIN is required to be obtained prior to becoming an eligible officer. The Registrar may also direct certain persons to apply for a DIN and those persons will have a certain application period based on that direction.
Eligible officer is defined to include a person appointed to the position of a director or an alternative director regardless of the name that is given to that position.
Note that director is broadly defined in the Act to include a person who is acting as a director or that the directors act in accordance with their directions (defacto/shadow directors) even where they are not formally appointed as such. The Act is not clear as to whether the DIN framework will apply to defacto/shadow directors. Given the penalties that will apply, any person acting in such a position ought to seek legal advice to clarify their position.
Other officers may also be required to hold a DIN, however at this stage, there does not appear to be any clarification in the legislation as to what positions these other officers may hold.
Transitional provisions are currently in place whilst the requirements of the legislation are implemented. Advisors should continue to monitor the ATO’s webpage for updates and details of various legislative instruments:
Based on the legislation, the transitional periods are as follows:
Existing and New Eligible Officers (prior to 31 October 2021)
Have until 30 November 2022 to obtain a DIN.
New Eligible Officers (between 1 November 2021 and 4 April 2022)
Will have 28 days from becoming an eligible officer to obtain a DIN
New Eligible Officers (from 5 April 2022)
Must have a DIN before becoming an eligible officer.
Please note that these timeframes may change at the discretion of the Registrar.
Applying for a DIN
The application process is expected to be completed via an online form produced by the ATO and accessed via MyGovID. The legislation does not allow for another person to apply for a DIN on behalf of an individual (unless that individual is unable to do so).
A person who expects to become an eligible officer within 12 months may apply for a DIN (if they do not already hold a DIN). Once registered, an individual has 12 months to be appointed as an eligible officer or their DIN will be cancelled.
A person may only apply for and hold one valid DIN at a time.
Updating Eligible Officer’s Details
An eligible officer must inform the Registrar of any errors or corrections to their information attached to the DIN, however it does not appear that the legislation provides any timeframe for doing so.
There are a number of offences that may be breached where an eligible officer:
- fails to hold a DIN;
- fails to comply with a direction from the Registrar;
- applies for multiple DINs;
- provides a false DIN;
- misrepresents their DIN; or
- provides false or misleading information.
Committing an offence may result in an infringement notice being issued or possible civil and/or criminal prosecution. The maximum penalties are 60 penalty units ($13,320 at the current penalty unit rate of $222) and 1 year imprisonment.
Certain offences may also be applied against those involved in a contravention, which could include the eligible officer’s advisors. We recommend that advisors, particularly those who assist their clients with setting up new companies, update their checklists to ensure that the DIN requirements are met.
The changes required for the implementation of the DIN legislation will add additional compliance costs for eligible officers. The legislation requires the eligible officer makes the DIN application themselves and therefore their advisor is unable to do it on their behalf.
Advisors should ensure that they inform their clients of the requirements to hold a DIN to ensure that they themselves are not liable for any breaches of the Act.
Advisors’ checklists for appointing new directors/eligible officers and forming new entities registered under the Act should be updated to include the new DIN requirements.
The implementation of a DIN will assist regulators with tracking individual directors, especially in relation to their former corporate history.
ASIC have in the past utilised director banning as a method to prevent illegal phoenix activity. The implementation of DIN and the ATO’s data matching abilities will further strengthen the banning enforcement process.
The above information is not intended to be legal advice and no reliance should be placed on the information (or dates) contained above. We recommend that advisors and their clients undertake their own enquiries as to their requirement to hold a DIN and seek legal advice where appropriate.