The $1.3m fine hanging over self managed super fund directors’ heads

Regulators are clamping down on director IDs and you may need one, especially if you have a self managed super fund.

Australian Securities and Investments Commission chair Joseph Longo. Picture: Britta Campion

Up to one in five self managed super fund trustees are looking down the barrel of heavy fines.

They could potentially face a penalty of up to a maximum of $1.375m from corporate watchdog ASIC over so-called director IDs – a new system of which adoption to date has been much too slow.

In April 2021, the federal government announced the introduction of the Director Identification Number (DIN) system. All company directors in Australia were required to register for a unique 15-digit identification number which is managed by the ATO as prescribed under the Corporations Act.

All SMSFs operating under a corporate trustee – the most common structure for the majority of newer funds – are now in the sights of the regulator. So too is any SMSF fund which has taken out a loan to buy property.

An ATO spokesman says: “The community can expect the ATO will take a reasonable approach to directors who have genuinely tried to meet their director ID obligation but have not been able to due to their circumstances.

“However, the deadline for many directors to apply has now passed and we take noncompliance with applying for director IDs seriously.

“We are still urging all directors who haven’t already applied for their director ID to do so as soon as possible.

“The application process has not changed and directors can apply online at the ABRS website.

“The ATO has now commenced contacting directors who have not met their obligation to apply for a director ID. In the first instance directors will be provided with guidance on how to apply.”

We can assume that if the director, or SMSF corporate trustee, has not reacted to the actions of the ATO, a referral will be made to ASIC, which is responsible for enforcing director ID offences and applying fines for failure to apply for a DIN.

Of note, not all SMSF trustees are required to apply for a DIN. If you have an individual trustee SMSF you are not required to apply for a DIN.

However, there is one exception. If your individual trustee SMSF undertakes borrowing activities via a Limited Recourse Borrowing Arrangement (LRBA), typically to acquire a property asset, you will also need to apply for a DIN as the LRBA requires you to be a director of the bare trustee, which is a Pty Ltd structure.

And if you operate via a corporate trustee SMSF, regardless of whether you have an LRBA or not, you are required to apply for a DIN.

Interestingly, SMSF trustees have been more compliant than the broader population of company directors when it comes to obtaining a DIN.

Twenty per cent of all company directors have not applied for a DIN, however when it comes to the 700,000 directors of corporate trustee companies for SMSFs, about 600,000 have their director ID, which means only 14 per cent are yet to apply.

One of the target areas in the new initiative is “phoenixing”, whereby a director loads up a company with debts to creditors, unpaid employee entitlements and tax obligations, then abandons the company or transfers the assets to a new company below market value. The old company is placed in administration while the new company trades without regard for the debts and creditors of the earlier business.

Bishop Collins Chartered Accountants’ Timothy Ricardo says: “Phoenixing is still a problem today and similar to the ‘bottom of the harbour companies’ which operated during the 1970s.

“A company would strip away all assets and profits to directors then transfer management to a patsy and finally physically throw the company register and associated document into Sydney Harbour.”

The message is clear: If you are a director of a company, which includes the corporate trustee of a SMSF and bare trustee, you are getting close to your final warning before the hammer comes down and ASIC potentially issues you with a seven-figure fine.

If you are unsure whether you require a DIN, or are unsure how to complete the process, it is advisable to liaise with your accountant or the ATO as soon as possible.

James Gerrard is principal and director of Sydney financial planning firmfinancialadvisor.com.au