Are you feeling uncertain when it comes to paying directors’ fees and being compliant with the ATO?
You’re not alone.
It’s a question we get asked often – should we be paying directors, and if so, how should director fees be paid?
Claiming a deduction lowers your overall tax liability, so you’ll want to be clued up on all the rule and procedures.
Directors’ fees can get a little tricky because you need to follow procedural requirements when paying them. Not only that, there are rules prescribed by the Australian Tax Office that you need to be aware of if you want to claim directors fees as a tax deduction for your business.
We’ve broken down everything you need to know.
- 1 What Are Director Fees?
- 2 What Is the Difference Between the Three Methods of Payment?
- 3 Directors Fees ATO Compliance
- 4 Directors Fees ATO Tax Deductions
- 5 Directors Fees ATO Non-Compliance
- 6 Key Takeaways
What Are Director Fees?
Before delving into the rules and procedures, you’ll need to understand the different ways directors can be paid.
Most commonly, directors are paid either through:
- a salary;
- directors fees; or
While each payment method compensates the directors for their services; they each have different tax implications and tax compliance procedures.
What Is the Difference Between the Three Methods of Payment?
A director who works in the company is likely to receive a regular salary, just as other company employees are compensated through a salary.
If, however, the director merely serves as a company director, in other words, they don’t fulfil any employee responsibilities; then they are classified as a non-executive director and director fees are used to compensate them for their services.
Directors fees are only paid if the company constitution allows for it or if there is formal approval from the shareholders. So, the company’s constitution or its shareholder agreement determines what fees a director is entitled to.
While paying a salary or directors fees differs in the reason for compensation, they do share one similarity: superannuation. Although directors are not technically company employees, the company is still required to make superannuation guarantee contributions on their behalf.
Depending on the shareholder agreement, a director can also receive compensation in the form of a dividend.
A dividend is a portion of a company’s profit that it decides to pay out to shareholders, in return for their investment.
Directors Fees ATO Compliance
When the ATO audits a company, they’ll consider all areas of tax compliance, including:
- PAYG withholding;
- fringe benefits tax;
- payroll tax; and
- superannuation guarantee contributions.
If your company constitution or shareholder agreement provides approval for directors to receive directors fees, you’ll need to comply with the following directors’ fees ATO requirements.
When you make payments to employees, individual contractors and other businesses, you need to withhold an amount from the payment and send it to the ATO.
This is called PAYG withholding.
The objective of PAYG withholding is to prevent employees from paying a significant amount of tax at the end of the financial year.
Much like how you would withhold PAYG tax on regular salary payments to your employees, you have to withhold PAYG tax from the gross directors’ fees.
In terms of your company’s reporting requirements, you’ll also have to report your directors’ fees PAYG withholding on your business activity statement (BAS).
Your company is similarly required to issue a payment summary to each director. Think of it like a payslip. It must indicate how much your directors’ fees you paid them for that financial year and how much you withheld from these payments.
PAYG withholding and reporting is a vital compliance obligation if you want to claim these payments as tax deductions.
Fringe Benefits Tax (FBT)
A fringe benefit is a form of remuneration paid to the employee (or their associate) in addition to their salary or in this case, directors fees.
If fringe benefits have been provided to directors during the financial year, these need to be captured in the annual FBT tax return.
Fringe benefits include, but are not limited to:
- providing a director with an interest-free loan;
- allowing a director to use a work vehicle for their private purposes;
- reimbursing a director for their children’s school fees;
- paying a director’s health insurance; and
- paying for entertainment packages such as hosting a Christmas party for the directors, employees and their partners
For more on FBT, make sure to check out our ultimate guide on fringe benefits tax!
Should Your Directors Fees Be Captured for Payroll Tax Purposes?
Although directors’ fees are different to salaries, they’re still subject to payroll tax. So, yes, in order to be ATO compliant, your directors’ fees must be recorded for payroll tax purposes.
It’s worth noting that your directors should also be covered for WorkCover insurance purposes.
Superannuation Guarantee Contributions
Directors fees fall within the definition of ordinary times earnings, so superannuation guarantee is applicable.
This means that all directors fees are subject to superannuation guarantees and payments (9.5% of their gross directors’ fees) must be made to complying super funds or retirement savings accounts.
Directors Fees ATO Tax Deductions
Directors fees are treated as a tax-deductible business expense in the year they are paid.
However, the ATO does make provision for if the company intended to pay directors fees in that financial year. So, you can claim a deduction when payments are accrued but before they’re actually paid out.
Given that every cent counts in the current distressed market, this could potentially be a cashflow advantage.
Your company board will have to pass a formal Board resolution to pay directors fees. If the resolution is passed in the current financial year, you can claim the tax deduction even if the directors fees aren’t paid by the end of that financial year.
Directors Fees ATO Non-Compliance
On 1 July 2019, ATO introduced new rules which affect whether or not you can claim tax deductions for payments made to directors, employees and contractors.
Directors fees payments are non-compliant if you have not withheld PAYG amounts or reported them as required, for example.
The consequence of non-compliance: you can’t claim a tax deduction!
So in order to claim a tax deduction for your paid directors’ fees, you must ensure you’re compliant with all the ATO tax requirements, including:
- withholding PAYG;
- capturing FBT;
- preparing the payroll for the director fees;
- superannuation; and
- filing to the ATO as per the single touch payroll rules
Have you considered your directors’ fees ATO obligations recently?
There are various compliance points that need to be considered concerning paying directors fees if you want to claim tax deductions on your business’s expenses and ultimately minimise your tax liability.
Consider the following questions:
- Are you withholding PAYG withholding from the Directors fees?
- Are you issuing an employment payment summary?
- Is your company capturing benefits provided to Directors in the annual fringe benefits tax return?
- Are you making the relevant superannuation guarantee contributions on behalf of your directors?
If you’re still feeling unsure about whether your company is complying with the directors’ fees ATO requirements, you may want to consider speaking to tax professionals.
At Box Advisory Services, our small team of experienced accountants can help you navigate through paying your directors fees and being ATO compliant.
To find out how we can help you, book a free consultation with us to assess your situation.