The issue of Director’s fees often comes up – should we pay directors? If we do pay fees how and what should they be paid? We answer the common questions for private companies.
Can you pay a Director?
Directors who work in the company, executive directors, would generally have an agreed executive remuneration structure that takes into account their service including attending Board meetings (so, generally no extra fees for service outside of the agreed remuneration structure).
For non-executive directors, companies can only pay Director’s fees if:
- In the case of for-profit companies, payments are allowed if the company constitution allows for it or a resolution is passed to make the payments. The resolution to pay directors fees must be made and documented prior to the fees being paid.
- In the case of not-for-profit charities registered with the ACNC, as long as payments to board members are in furtherance of the charity’s charitable purpose, permissible under the charity’s rules, and properly authorised within the entity, the ACNC does not prohibit them. However, any payments to board members that are unreasonable, unauthorised or unjustifiable may mean that the charity is not complying with the ACNC’s Governance Standards. Furthermore, if a charity that is a Company Limited by Guarantee wanted to apply to be allowed to omit the word ‘Limited’ from its name, the Corporations Act 2001 (Cth) requires that the charity prohibits payment to its directors. Similarly, a charity that is a trust, cannot pay its trustees unless its trust deed specifically sets out that they are to be paid. Fundraising laws in some states may also regulate payments to board members.
These fees are in addition to any agreed expenses such as travel expenses to attend board meetings or in connection with the company’s business.
Fees paid to directors are subject to disclosure requirements. Special rules exist for listed entities, APRA-regulated financial institutions and specific advice should be sought for the management of director fees by these entities.
Tax deductibility of director’s fees
Fees paid to Board members are tax deductible to the company in the year they are paid or intended to be paid. Many Boards pass a resolution to pay Director’s fees just prior to the end of the financial year to claim the tax deduction in that same year. The fees do not necessarily have to be paid prior to the end of the financial year but the Board must have definitely committed to paying them and then the fees paid as soon as practicable.
Tax on director’s fees
Assuming the directors fees are being paid through an individual contractual arrangement (i.e. the contract is with Mr Smith to act as a director, not with Smith Pty Ltd to provide ‘someone’ as a director, and that happens to be Mr Smith), then the directors fees are treated like salary and wages for the purposes of PAYG withholding. PAYG is required to be withheld from the gross directors fees, reported on the IAS or BAS that is used to report the salary and wages and related PAYG W for that period, and should be remitted to the ATO.
Director’s fees fall within the definition of Ordinary Times Earnings, and superannuation guarantee applies.
Director fees are required to be reported on a payment summary, and are generally reported at item 2 of an individual’s tax return. If they are not reported on payment summaries, it could result in errors in the PAYG withholding annual report, and queries from the ATO regarding the payments.
While the ATO may recognise that there can be a difference in the provision of services by and payments to directors (e.g. the contract may be for ongoing director services and attendance at quarterly board meetings, with payments of director fees to be made once a quarter, not monthly), the PAYG W and superannuation contributions are still subject to reporting and payment by the standard deadlines that apply for all other employees.
The directors fee should also be included in any workers compensation calculation and would generally be captured for payroll tax purposes as well.
Can Director’s fees be paid as super contributions?
Yes, assuming the proper process has been followed (e.g., effective salary sacrifice arrangement has been entered into before the fees have been earned), fees can be paid to the Director’s superannuation fund as a reportable employer contribution to utilise preferential tax rates. This assumes the director is within their contribution limits.
The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.