More than 1 million people could become ineligible to run companies by the end of this month — and face fines of up to $13,000 — as the Australian Taxation Office introduces a new hurdle to crack down on “dummy directors” and the practice of “phoenixing”.
Key points:
- It will be mandatory for all company directors covered by the Corporations Act to have a unique ID number by end of November
- The director IDs will allow authorities to track activities through various government databases
- Those IDs are being introduced in a bid to crack down on so-called “dummy directors” and company “phoenixing”
Director IDs are being made mandatory for every director covered by the Corporations Act and must be in place by the end of November.
This covers people running major entities, many small businesses, and even charities and not-for-profit groups.
The ABC can reveal that half of Australia’s estimated 2.5 million directors have not yet been issued one, with just weeks to deadline.
Andrew Barnden is a liquidator who is well aware of the necessity for the new ID system.
Currently, people can sign up as a director of an entity with little proof of their authentic identity.
In his years assessing failed companies, Mr Barnden has come across collapsed companies that were apparently being run by famous football players.
“I’ve heard stories of [directors] being put down as Mickey Mouse and also Porky Pig,” he added.
Then there are the more egregious examples of what the liquidation industry calls “dummy directors”.
Mr Barnden has seen people with little-to-zero connection to the everyday running of a company officially appointed as its director, including backpackers, distant relatives and even the homeless.
This opens these real people up to legal ramifications, including fines and bankruptcy, if the company collapses and is found to have acted against the law.
It also makes it very hard for liquidators — such as Mr Barnden and his firm, Rodgers Reidy — to investigate the true dealings of a failed entity and its business connections.
This speaks to the heart of why this underground corporate culture exists.
“Dummy directors allow companies to be placed into liquidation owing significant amount of debts [and then] allow new companies to be incorporated, with the [original] business assets transferred,” Mr Barnden explained.
Often dubbed “phoenixing” — when a new company rises from the ashes of another — this practice costs the nation’s economy between $2.9 billion and $5.1 billion annually, according to the ATO.
“Probably about 5 to 10 per cent of companies that we come across have some form of phoenix activity — or misappropriation of assets or [are] breaching the law,” Mr Barnden said.
Often the loser is the ATO itself, when a company liquidates having avoided paying taxes for itself or its workers. However, the practice can also leave sub-contractors, employees, customers and suppliers owed money and entitlements.
Plumbing business owner Michael McGeary is one of an estimated 2.5 million people who will now need to have a specific and authenticated ID to link them to their own company.
He supports this new measure due to the heartache he has experienced as a result of company collapses.
Mr McGeary estimates that his plumbing business has lost around $350,000 over 40 years to companies that have liquidated themselves before paying up their invoices.
In some instances, he says, they later went on to rise from the ashes.
Construction is one of the industries most commonly associated with phoenixing and dummy directors, which does not surprise Mr McGeary.
He said the most-rife practice in trades was companies being legally run by a person’s wife, but clearly operated by the husband.
“A lot of people have gone into the building industry with eyes wide open but with dollar signs,” he said.
Mr McGeary ended up taking out equity against his family home to deal with his business debts, and believes the stress of the experience directly impacted his health.
“It did affect my health and I got quite sick for a while,” he said.
“There needs to be some sort of tighter control on companies liquidating and then handing off the directorship to somebody else.”
How could authenticating IDs help crack down on dodgy dealings?
The ATO says director IDs will crack down on this issue, because they will authenticate who is controlling companies and make it easier for liquidators to connect dodgy dealings.
The scheme is being implemented by the Australian Business Registry Services (ABRS), which is a unit within the ATO.
“Until now, there hasn’t been a verified way of confirming directors of companies on the company’s register,” ABRS deputy registrar Karen Foat told The Business.
The director IDs were first brought in for a sub-set of newly appointed directors late last year, and Ms Foat said the early evidence was they were helpful in addressing dummy directors and linking phoenix entities.
“We’ve actually found already that it is starting to help us to address the type of type of circumstance where someone is appointed as a director of a company and they don’t know that they have been appointed,” Ms Foat said.
“It helps us hold people to account when they are undertaking these dodgy practices.
“It helps us to track people’s relationships with different companies over time.”
Phoenixing is notoriously rarely prosecuted by official corporate regulators in Australia.
Liquidator Andrew Barnden agrees the IDs will help build a case against entities or people who have allegedly acted unlawfully.
“It’s a good thing to bring up,” he said.
“It will be it will be a lot harder to rort the system.”
However, Mr Barnden is concerned that not enough of the industry is aware of the looming legal requirement for the IDs.
All directors need to be signed up for the scheme by November 30. This includes people who head up local companies, overseas entities carrying out business in Australia, trustees, people who run charities, and the one-in-four small businesses set up with a company structure.
The only exception is company directors of Indigenous corporations, who have been given an extra year, until November 30, 2023, to apply for an ID.
As of this week, just 1.14 million director IDs had been issued, the ATO said.
It estimates there’s 2.5 million directors overall.
Why haven’t many directors signed up?
Liquidator Andrew Barnden says many directors have not signed up to the scheme because of the hurdles required — including sending in paperwork, authenticated ID and other processes that are similar to applying for a passport.
The process can all be done online, and takes about 15 minutes if you have a passport and driver’s licence.
However, Mr Barnden said that was still a barrier for some, and there are lots of directors that are not tech-savvy.
“It has to be done by the individual. A lot of people rely upon their accountants or lawyers to do all the paperwork for them,” he said.
“I’ve heard of the issues with elderly people with old flip phones — that don’t meet requirements to allow them to download the document — having [no] storage space to do it.”
For people trying to kickstart the process over the phone, Mr Barnden has heard “horror stories” of people spending long wait times on hold.
He is worried that some people with good intentions — or who just did not know about the requirement — will be fined for not getting their ID by the deadline.
People who have not applied by November 30 could face a penalty of up to $13,000, the ATO has confirmed.
“Whilst penalties can apply, the community can expect we will take a reasonable approach to support people to apply,” the ATO said in a statement.
Even plumber Michael McGeary — himself a director of an incorporated small business — did not know about this requirement until contacted by the ABC.
He has since spoken to his accountant, and has dedicated himself to getting on the ATO’s app to put through the documentation this week.
ABRS deputy registrar Karen Foat is urging all required company directors to “get their skates on”.
“We have put more staff on the phones, and we are currently seeing around a 3-minute wait time for people who need to contact us,” she said.
“It’s best to do so now, before the rush.
“We do have phone and paper options for people who cannot use the digital process, but we find that the vast majority of people want to, and can, use the digital process.
“We’ve commenced a quite large communication campaign to get the message out to directors that they need to apply. So people will start to see that out on on billboards and lots of places at the moment.”
The body for chartered accountants — which often advises directors on the necessity of following the law — is also urging people to sign up to the system.
“While many directors have already applied, human nature means others have put off the task,” CA ANZ’s business reform leader, Karen McWilliams, said.
“There will be a significant increase in applications and queries to the ATO as the deadline approaches and we warn members, and applicants, to pack their patience.
“Online systems have limits and ATO staff can only get to so many queries each day.”
People who intentionally avoid creating their ID could face fines of up to $1 million.
