The new director ID regime

Directors of an SMSF corporate trustee will now need to obtain a director identification number in order to continue to play that role. Tia Thomas examines how the system works and some of the associated challenges.

The requirement introduced last year to obtain a director identification number for trustees of an SMSF with a corporate trustee structure has been largely accepted by the sector, but the machinations of the regime have proved challenging.

After its implementation on 1 November 2021, more than 250,000 directors have applied for a director ID and these numbers are expected to surge as future deadlines approach.

While the additional procedures and document collection can be seen as an inconvenience for those affected, the security protocols have been designed to improve the integrity of all company directorships by preventing incidents of fraud and identity theft, which are increasing in number.

To this end, SMSF Association policy manager Tracey Scotchbrook believes the regime will allow the Australian Securities and Investments Commission (ASIC) to better protect trustees’ private information due to the track and trace nature of the framework.

“Prior to the director ID, there was no process around identity and identifying someone who was a director of a company. There was no gatekeeping if someone was using someone else’s details illegally,” Scotchbrook says.

As all directors need to comply with the new regime, she urges directors of an SMSF with a corporate trustee to apply earlier than necessary, via the myGovID app, mail or telephone, in order to avoid any legal consequences that can arise under the Corporations Act 2001.

When applying for the ID, she says individuals need to pay particular attention to the finer details of the online process.

“People need to set up a myGovID account and that is quite different to a myGov account. It will require someone to have a smartphone or smart device to be able to access the myGovID,” she says.

“It will prompt you and take you through a process of scanning in your ID and putting in details, and this will be an essential first step because that provides the security check.”

Verante director and SMSF specialist adviser Liam Shorte suggests directors pre-organise documents, including driver’s licence, passport and birth certificate, if applying online to prepare for potential complications.

“If you are an immigrant, make sure you have completed your Medicare card as well, because the problems for a lot of people is that documents do not match correctly,” Shorte explains.

“You need to have your tax file number (TFN) as those documents will prove your identity. It can be very quick for some people, but for those that come from overseas there can be slight differences in their names and it can take up to half a day to get it sorted and some have had to resort to the paper applications.”

In particular, this method will assist SMSFs manage the deadlines with the process where existing directors have until November 2022 to obtain a director ID, while new directors appointed from 1 November 2021 to 4 April 2022 only have 28 days to do so. Further, after 5 April 2022 newly appointed directors will need to have their ID in place beforehand.

The implications of these deadlines also extend beyond current company directors.

Chartered Accountants Australia and New Zealand superannuation leader Tony Negline warns replacement directors and existing powers of attorney will need to comply with the requirement and the stipulated deadlines and should allow for additional time for the process to be completed.

“Let’s say we are talking about a fund where the trustees are overseas for an extended period of time and do not want the fund to become a non-resident fund, or where the trustees are potentially suffering from some type of mental incapacity,” Negline says.

“The enduring power of attorney is appointed in their seat, but that individual has to resign as a trustee and then someone else has to be appointed in their place. That new director would also need to have an ID.”

On a positive note, an individual director only requires one ID. Even if an individual’s ID has been made invalid because it hasn’t been used for 12 months, it can be reactivated upon request as long as the person can legally still hold a directorship.

Financial advisers have played a vital role in spreading awareness, but it is important to note their scope of assistance is limited as practitioners cannot complete the application on behalf of a client due to privacy restrictions. However, financial advisers have quickly adapted to the regime requirements.

“Accountants and advisers do have an important role to play, particularly around the education aspect, and helping and guiding their clients to make sure they are aware of the requirements and that they are complying,” Scotchbrook says.

“Certainly for any new directors being added, the accountant and adviser is going to have to be aware of how these rules operate, particularly the timing of when someone needs to be registered.”

She warns those that do not comply will receive a penalty depending on the severity of the breach, including misrepresenting a director ID or applying for multiple numbers.

“It is a fine of up to $13,200 under the criminal provisions and up to $1.1 million under the civil provisions,” she says.

Contraventions of the Superannuation Industry (Supervisory) (SIS) Act can additionally lead to directors being disqualified. Such actions include if a person is declared bankrupt, if the director has been an officer of two or more companies that have entered liquidation in the past seven years, or if the individual has engaged in dishonest conduct.

However, the penalties should not cause SMSF trustees too much angst in the short term due to the ATO’s initial compliance approach to the new requirement.

ATO assistant commissioner Martin Jacobs confirms the regulator is taking an educational approach to provide directors who have attempted to adhere to the new rules with the opportunity to resolve non-compliance events.

“It is always hard [during] transition periods, but we have tried to make it as clear as we can on the website about who needs to apply and when,” Jacobs notes.

“When we look at why this measure has been introduced, which is to support addressing the challenge of illegal phoenixing, there will be circumstances in which we will take a different approach to non-compliance.”

He says directors who are willing to work with the ATO to resolve noncompliance activity will be better suited to the process, as the regulator will send two separate letters reminding directors to obtain an ID and if no response is received other contact methods will be explored prior to legal action.

“After we have made contact with them and advise them of the consequences, it brings their attention to the fact that they need to get a director ID. Then we will help support them, whether it’s a digital application or whether it’s because they had challenges, in terms of completing the documentation,” he reveals.

The educational approach is also deemed to work in the favour of directors living overseas as there can be a number of obstacles, including a lack of awareness, limited time and documents.

“Individuals can go to the Australian embassy and consulates to get documents verified, and in certain countries we have arrangements so people are authorised to certify documents. But we do recognise there is a more onerous obligation on people to have to go and get a document certified, which is why we’re going to be accepting and understand if people need additional time,” Jacobs says.

Scotchbrook further notes directors living overseas may need to consider paper applications, which reinforces the need for early organisation as sending documents via mail can be unpredictable regarding timelines.

In addition, the ATO will be offering to support numerous SMSF trustees who are pre-retirees or retirees who may not be as proficient with online procedures. This is despite 93 per cent of the applications received since the regime’s implementation having been made via myGovID.

Nevertheless, Shorte indicates he is already experiencing the challenges for clients in the older demographic.

“What I am finding is that we have a lot of trustees in their 70s and 80s now, so we are having to walk them through the process. We are going to start the process when they come in for their interview and we’ll probably spend 15 minutes walking them through the process,” he notes.

“Even though we have 10 months, remember that the sooner we get it started the better. Any client that has had to make any change or change a trustee or set up a new LRBA (limited recourse borrowing arrangement), we are taking that opportunity to get their ID in place.”

Despite the director ID reducing the risk of fraud, Evolv chief executive Ron Phipps-Ellis has already identified a flaw in the system and says the benefits for auditors are limited as the regime fails to recognise their role in notifying regulators of trustees who have been disqualified, which is not an automated process.

“Auditors are required to check if a trustee, director or an individual is a disqualified person, which is defined in the SIS Act. We normally check this annually by logging into the ASIC website. This is a manual process that takes a bit of time,” Phipps-Ellis notes.

“As auditors, unless there is a realtime alert system, we will only find out when we do the audit, which is normally anywhere from six months to two years after the event.”

He suggests an automated alert system be installed that would inform accountants, auditors and other financial services participants of a director’s status, despite the responsibility of informing the industry being placed on the trustee.

Negline suggests scepticism could present another headwind for the framework. He says a lot of directors have the mindset of: “I am retired and so why should I have to go through all this hassle just because of the actions of a small minority of people who want to do the wrong thing?”

“It’s hard not to have sympathy for that view. But you will tell the government information about yourself once and it will be populated across licences or accreditation and so hopefully it will lead to efficiency,” he says.

The high volume of digital applications calls for quality security protocols in order to protect privacy of information, and the systems involved utilise built-in cryptographic technology on smartphones to identify an individual’s fingerprint or facial recognition.

Negline suggests the privacy protocols of the IDs will need to be the same or similar to those that apply to a TFN.

“I think it would probably be a good idea for financial advisers and also accountants to actually handle director IDs in the exact same way. We might not necessarily need to do that at this point in time, but I think that for safety purposes we should treat things like tax file numbers,” he says.

“That’s probably where the system will go in the long term, so then we will be ahead of the curve rather than having to play catch-up.”

Jacobs says the ATO has discussed the ideology and while the personal information detailed in a director ID will not be disclosed, it will not quite meet the same secrecy standards of a TFN.

“Currently, there is no change to the ASIC online transaction forms, which stipulated you cannot currently provide a director ID number to ASIC. There is no ability to capture it, nor have we included it at the moment in ATO lodgements,” he says.

“In 2023, when we do the new companies release, I guess we are expecting the director identification number to be something that would be requested. So when you go to appoint a director or you try to change director, that’s the likely stage we’re going to ask for the person’s director identification number.”

Even though the system is in its infancy, Jacobs is very optimistic about the outcomes it will eventually produce.

“It’s certainly very critical for us to have in terms of helping prevent the use of false and fraudulent director identities and it’s going to make it easier for government regulators to trace director relationships over time,” he concludes.