The Government has announced a package of reforms in a bid to crackdown on illegal phoenixing activities, which are said to cost the economy up to $3.2 billion per year.
One of the key reforms is the requirement for every company director to be issued with a unique Director Identification Number (DIN). The DIN will be used to match data between different Government agencies and databases, which will allow regulators to map the relationships between different individuals and entities.
The move follows on from a recommendation in the Productivity Commission’s Business Set-up, Transfer and Closure inquiry final report in December 2015 (PC Report).
The Labor Party also supports the introduction of the DIN as confirmed in a policy announcement made on 24 May 2017. Coincidentally (or not), Labor’s announcement followed only weeks after the Plutus Payroll tax fraud allegations came to light.
Currently, it is easier in Australia to register as a director than to open a bank account. An individual is only required to provide the Australian Securities and Investments Commission (ASIC) with their name, address and date of birth, but is not required to prove their identity with, for example, a driver’s licence. This can be easy to accomplish, and enables unscrupulous directors to undertake “phoenixing” activities – that is, setting up new companies, incurring debts with legitimate businesses and employees, and then transferring assets to another entity in order to avoid paying liabilities.
Although the Government’s announcement does not state how the DIN system will be administered, the PC Report recommends that DINs be implemented by way of a low-cost one-off online registration on the ASIC website the first time an individual takes up a directorship. The registration would involve a 100 point proof of identity check (based on the identification requirements for opening a bank account).
For existing companies, the PC Report recommends that directors should be required to provide DINs to ASIC at the annual review date for the company, as a change to company details.
In addition to the DIN, the Government intends to consult on a range of other measures to deter and disrupt the activities of phoenix operators, and to identify high risk individuals, who will be subject to new preventative and early intervention tools. Example of potential measures include:
- enabling the ATO to force suspected phoenix operators to provide a security deposit, which can be used to cover outstanding tax liabilities;
- making directors personally liable for GST liabilities; and
- preventing directors from backdating their resignations to avoid personal liability or from resigning and leaving a company with no directors.
These measures are said to complement and build on the Government’s other actions to combat crime and fraud in the economy, such as the Black Economy Taskforce.
From a practical perspective, the change means all companies will need to incorporate the DIN registration process as an additional step in appointing directors. In the first year DINs are implemented, existing directors will also need to undergo the DIN registration process.