Directors’ responsibilities – what your client needs to know

This article was current at the time of publication.

Australian company directors will soon be required to have a unique 15-digit director identification number that will be linked to them for life, under changes to the Corporations Act 2001. 

The ID requirement extends to directors of a registered Australian body, registered foreign company, or Aboriginal and Torres Strait Islander corporation.  

A director ID is not required for non-director roles such as a company secretary, a person acting as an external administrator of a company, or someone running a business as a sole trader or partnership.

Director IDs became mandatory in April 2022 for all new directors and will become compulsory on 30 November 2022 for all directors appointed before 31 October 2021.

New directors have 28 days from their appointment to apply and it’s a criminal offence to not do so on time.

To date, according to the Australian Tax Office (ATO), around 62 per cent (740,000) of Australia’s 2.7 million directors have already registered for their director ID.

If they haven’t already done so, practitioners with clients who are directors should remind them to register for their free director ID online via the Australian Business Registry Services (ABRS) website.

To apply, individuals will first need a myGovID together with identification such as their tax file number, the residential address held by the ATO, and two other personal documents to verify their identity.

These documents are also detailed on the ABRS website.

Why director IDs are required

Director IDs have been introduced at a federal level for a range of reasons.

Primarily, however, shareholders, employees, creditors, consumers, external administrators, and regulators are entitled to know the names and certain details of the directors of a company.

This is important to help prevent the use of false or fraudulent director identities and to make it easier for external administrators and regulators to trace directors’ relationships with companies over time.

Further, using director IDs can be crucial in identifying and eliminating director involvement in unlawful activities such as phoenixing.

Illegal phoenix activity is where a company’s assets are transferred into a new entity controlled by the same directors to avoid debts, most typically tax and employee entitlements owed by the previous company.

These directors will usually then start a new company to continue the same business activities, but without the debts incurred by the failed entity.

Partner at law firm Piper Alderman, Michael Lhuede, who specialises in corporate and personal insolvency, confirms that director IDs are part of a wider platform of government reforms intended to combat illegal phoenixing.

“The practices that were attracting media attention were particularly prevalent in labour-hire companies,” Lhuede says. “There was no question it was out-and-out fraudulent behaviour.

“They were establishing companies as employers and putting nominees in as a director – people literally off the street who had nothing to do with the business. It was clearly fraudulent.”

Lhuede says implementing the director number identification system is a key way to prevent this from reoccurring and to demand greater accountability from directors generally.

“This will certainly make it harder to do that and has certainly created a series of offences if there’s any attempt to undermine the provision by getting multiple ID numbers.

“The director ID doesn’t say anything about their ability to manage a company, but what it does do is [demonstrate] that if a person puts their name to a company as a director, then we know that person exists, which is really what this is all about.”

Regulatory focus

According to an ATO spokesperson: “During the transitional period, our focus is on education and raising greater awareness of director ID obligations.

“We want to support directors to apply and do the right thing. We have commenced contacting directors who have been identified as needing to apply for a director ID and the response rates to these communications have been positive.

“The registrar does have the powers to take firmer action if a director’s behaviour is egregious or demonstrates an unwillingness to comply with the requirements to obtain a director ID.”

The Australian Securities & Investments Commission (ASIC) is responsible for enforcing director ID offences set out in the Corporations Act.

Failure to have a director ID when required and neglecting to apply for a director ID when instructed to by the ABRS registrar both carry a maximum criminal penalty for individuals of $13,200 or up to $1.1 million in civil instances.

Applying for multiple director IDs or misrepresenting a director ID carries a maximum criminal penalty of $26,640, one-year imprisonment, or both, or up to $1.1 million in civil cases.

Directors are required to notify their company within seven days of changes to their name, role or address, and company recordkeepers must notify ASIC of changes within 28 days to avoid late fees.

Directors unable to apply for a director ID within the specified dates on the ABRS website must complete an application for an extension of time to apply for a director ID form.