Not sure if you’re doing everything right when it comes to paying directors’ fees?
You’re not alone. Directors’ fees can be confusing because you need to follow procedural requirements when paying them. There are also ATO rules to be aware of if you want to claim them as a tax deduction for your business.
Claiming a deduction lowers your overall tax liability, meaning more money stays within the business and less goes to the tax man.
Directors fees: ATO treatment To boost your understanding of this topic – so you can optimise your tax position and stay compliant, we have compiled a quick 101 on directors’ fees. We’ll cover what they are, your compliance obligations and tax planning opportunities.
What is a director’s fee?
Let’s start from the beginning.
Directors are commonly be paid in three ways – through regular salary, directors fees or dividends. Each of these compensates the director for his or her services but have different tax compliance and tax planning implications.
Directors fees vs salary
A director who works in another role within the business is likely to be compensated through a regular salary. As an employer, the business also makes superannuation guarantee contributions on behalf of the director at the current rate of 9.5%.
But for a company director who doesn’t have another role in the business, such as a non-executive director, fees are often provided as payments for their services.
Directors fees superannuation
Although directors are not technically company employees, you’re still required to make superannuation guarantee contributions on their behalf. Again, contributions are calculated at 9.5% of ordinary time earnings, which is based on the ordinary hours of work as agreed by the company and the director.
It’s important to point out that there are rules in the Corporations Act 2001 around how to pay directors’ fees, as directors cannot receive payments for their services unless the company’s constitution allows this to happen or there’s formal shareholder approval.
This means shareholder agreements or the company’s constitution form the basis of director fee agreements and they set out the payments that directors are entitled to.
Apart from compensation for the work they carry out, fees can also include travelling and other expenses in connection with the business like attending meetings.
Directors fees: ATO treatment
To learn more about the procedural rules around directors fees, talk to POP Business. We can advise you on the right steps to take to ensure your processes are correct. As expert accountants with plenty of knowledge in company regulations, we can also help with things like business set-up and Directorship changes.