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.
Tax compliance obligations
You’ll need to bear in mind the following tax requirements when paying a director a fee for their services.
The most important compliance obligation from a business perspective relates to directors’ fee withholding tax. This means withholding PAYG tax from gross directors’ fees, much like how you would withhold PAYG tax on regular salary payments to your workers. You’ll also report them on your BAS and submit them to the ATO.
As we’ll discuss later on, withholding tax on directors fees and reporting them correctly is vital if you want to claim these payments as tax deductions.
You’ll need to issue a payment summary to each director showing how much you paid them for the financial year and how much you withheld from these payments. Think of the PAYG summary as a director fee payslip which helps the directors to fill out their individual tax return at tax time.
Fringe benefits, payroll tax and WorkCover
If fringe benefits have been provided to directors during the financial year, these need to be captured in the annual FBT tax return.
Another point to note is that although directors fees are different to salaries, they’re still subject to payroll tax, as well certain fringe benefits.
It’s also important to ensure directors are adequately covered for WorkCover insurance purposes.
Is a director fee tax deductible?
Directors fees are treated as a tax deductible business expense in the year they are paid or intended to be paid. This means you can claim a deduction when payments are accrued but before they’re actually paid out – therefore gaining a cash flow advantage.
Intention is about showing commitment, and this can be demonstrated through passing a formal Board resolution to pay directors fees.
To illustrate, if a resolution is passed in the current financial year, you can claim the tax deduction even if fees aren’t made by the end of this financial year.
However, you’ll have to settle these amounts as soon as possible, and you cannot claim a second deduction when payments are finally made.
On 1 July 2019, ATO introduced new rules which affect the tax deductibility of payments you make to employees, contractors and directors as well.
Essentially, payments become non-compliant if you have not withheld PAYG amounts and/or reported them as required by the PAYG rules.
Unfortunately, you can’t claim a tax deduction for a non-compliant payment.
So in order to claim a tax deduction for directors’ fees, you must correctly withhold and report PAYG.
This means, preparing the payroll for the director fees, withholding PAYGW and superannuation. Then filing to the ATO as required per the single touch payroll rules.
Individual taxpayer FAQs
As we work with many small business owners who are interested in tax from both a business and an individual perspective, we’ve included some frequently asked questions relevant for individual taxpayers.
How are directors fees taxed?
Directors fees form part of the directors assessable income in the year they are paid/reported. The income is taxed at the director’s individual tax rates in their personal tax return.
The directors fees are deductible in the company as a business expense.
How to report directors fees on tax return?
You’ll need to use the payment summary issued to you by the company, and report the amount of payments you received and tax withheld at question 2 of your tax return.
How to pay directors fees?
A tax effective way to compensate directors is to make payments as employer superannuation contributions. If the director is still within his or her super contribution limits, then payments will only attract a tax rate of 15%.
However, it’s advisable to engage a tax expert such as POP Business if you intend to reward directors this way because you’ll need to have a salary sacrifice arrangement in place from the outset before fees are earned.tax