Hefty penalties for director ID issues – changes needed by advisers
Many advisers need to change their procedures before registering a company for clients to ensure their clients comply with the director ID number (DIN) requirements and hefty penalties are not imposed.
Failure to comply with the DIN rules may result in hefty penalties, given a range of strict liability offences in the Corporations Act 2001 (Cth) (CA).
Section 1272C(1) of the CA states that “an eligible officer must have a [DIN]”. Section 1272C(2) then provides that an offence is not committed if the person applied for a DIN before the day they first became an eligible officer. Note that the application must be before the day they first became a director (which, naturally, is not on the same or later day). This onus is on the director to prove their defence.
The best practice moving forward is to insist on a person obtaining a DIN before a company is registered even though the law allows a director to be appointed provided they apply for a DIN within the relevant time frame.
Advisers should insist on a DIN prior to registering a new company
The best practice for advisers moving forward is to change past practices and to insist on each new director obtaining a DIN prior to registering any new company for them. (This practice is recommended by DBA Lawyers and will be the law from 5 April 2022 in any event.)
While a new director currently has 28 days to apply for a DIN in the transition period leading up to 5 April 2022, the failure to obtain a DIN within the 28-day deadline is a strict liability offence.
An adviser who registers a company for a new director and that director does not apply for their DIN in time commits an offence. This leaves an adviser open to risk unless they follow up with their clients to ensure they apply in a timely fashion.
Advisers who register a company without insisting on a DIN upfront should have follow-up procedures to ensure their clients apply for a DIN prior to each 28-day deadline. For example, email reminders could be sent in 10 days, 15 days, 20 days and 24 days of each company registration to ensure the 28-day deadline is satisfied. If the client has applied within one of these time frames, then that “open” task can be closed. If the client does not respond or has not obtained a DIN prior to day 24, then further action may be needed, including confirming what must be done by the deadline and warning the client of the penalties that may apply if a DIN is not applied for before that deadline. These actions would assist in showing that the adviser has been diligent with follow-up and exercised reasonable care.
An adviser who provides a service of registering companies and expects directors to apply for a DIN within the 28-day deadline without managing this risk is open to liability. Their client relationship may also be adversely impacted if the client is subject to a penalty for a strict liability offence.
We all know of clients who commit to doing something but for one reason or another do not get around to doing it (e.g. forgetfulness, being too busy, unwell or attending to another family incident etc).
While you can seek to put the onus on each director to take care of their own DIN, even if the adviser has clearly notified the client in writing that this responsibility rests with them, there is always the chance of a vexatious litigant.
As you will appreciate, if an adviser insists on each person (who wants to be appointed as a director) applying for a DIN prior to a company being registered, then this eliminates the above risks and hassles and provides 100 per cent certainty. The adviser can then register the company without risk and is likely to save valuable time, resources and sleep that may otherwise be expended chasing up “tardy” clients.
A DIN will be required upfront from 5 April 2022 anyway
As noted above, new directors will need to apply for a DIN at least before the company is registered from 5 April 2022 onwards (refer to s 1272C above). This is an ideal time for advisers to obtain the written consent of each officeholder and shareholder of a new company prior to registering the company as required under s 201D of the CA. Failure to obtain this consent is also a strict liability offence. Despite this fact, there are many advisers who register a company and then ask their clients to sign the documents.
Thus, advisers should ensure their procedures moving forward is to obtain:
- A signed written consent of each officeholder and shareholder of a new company; and
- Each director (and alternate director) to provide their DIN;
prior to registration of the company.
This procedure should result in overall efficiency and reduce risk. Advisers who register a company without doing so may be subject to strict liability offences and risk their client relationships.
Note that where a director already has a DIN, they do not need to obtain another one before being appointed to another company. Each director can only apply for one DIN for their entire lifetime.
Applying for a DIN – who can apply and who can certify documents?
Advisers will not be able to apply for a DIN on a client’s behalf. While the preferred method is online via the myGovID app, clients may elect to apply for a DIN by way of a paper form.
The SMSF Adviser reported that over 185,000 directors had successfully applied for a DIN, and 95 per cent did so online using their myGovID as of 1 November 2021.
The lodgement of a paper form requires the applicant to provide the Australian Business Registry Services (ABRS) with certified copies of identity documents. It is important to note that the ABRS has provided guidance material stating that it will not accept documents certified by the applicant’s registered tax agent or ASIC agent due to their ongoing commercial relationship creating a real or perceived conflict of interest. Accordingly, the documents will generally need to be certified by an authorised certifier who does not have an existing relationship with the applicant.
Advisers should ensure that their client’s identity documents are certified correctly by the relevant deadline. Otherwise, a delay could result in an offence. While there may be a defence under s 1272C(2)(b) of the CA, the onus of proof is on the director to prove the DIN was applied for during the required time frame. Certifying documents may, therefore, end up proving an onerous task. Accordingly, advisers should insist on clients obtaining a DIN prior to company registration (rather than merely applying for one before the day of registration).
Where the company acts as an SMSF trustee
If the company acts as a trustee of an SMSF, each director must also sign an ATO Trustee Declaration within 21 days of becoming a director. This consent should also be obtained upfront before registration of the company for the same reasons outlined above.
Moreover, the risks outlined above have recently increased with the increase from four to six members in an SMSF from 1 July this year. Numerous SMSFs that formerly only had mum and dad as members and directors are now adding their children as members and directors, and their children may not be as alert of the risks involved given they are “new” to the world of SMSFs.
Contraventions and penalties
A contravention of the DIN rules occurs, among other things, where a director:
- Fails to obtain a DIN;
- Fails to apply for a DIN within the required time frame; or
- Provides false or misleading statements.
The above offences are strict liability offences, meaning that no intention needs to be proved. One maximum penalty is $13,320 (i.e. 60 penalty units at the current penalty unit of $222) and up to one-year imprisonment for some offences. If a declaration of a civil penalty provision is made by a court, a pecuniary penalty order can be made by the court with a maximum penalty of $1,110,000 (i.e. 5,000 penalty units at the current penalty unit rate).
Advisers could find themselves at risk of these hefty penalties if they are involved in any contravention. These new penalties provide a further incentive for advisers to review and revise their procedures before registering any new company.
Now is an excellent time for advisers to carefully consider and revise their procedures when establishing new companies. Advisers should also ensure that they have notified their existing clients that are already directors of a company about their obligations to obtain a DIN within the relevant time frames. We recommend that advisers should seek to encourage all of their clients who are directors without a DIN to apply for one as soon as possible.
Daniel Butler, director, and Zacharia Galloway, lawyer, DBA Lawyers.