What Are Director’s Fees?
Director’s fees are a form of compensation awarded to directors for their governance and advisory roles within a company. Unlike a salary that remunerates directors for their operational involvement and day-to-day management, director’s fees are typically provided to non-executive directors as a reward for their oversight responsibilities. However, these fees can also be structured as part of the total remuneration for working directors, recognizing their dual roles in both managing and overseeing the business.
Why Would a Company Pay Director’s Fees?
A company may choose to pay director’s fees to fairly remunerate board members for their strategic guidance and expertise. This method not only ensures a transparent and equitable compensation for the directors’ contributions but also offers flexibility in financial and tax planning for both parties. It strategically sidesteps the stringent requirements of Division 7A of the Income Tax Assessment Act, allowing for a more tax-effective way for directors to receive earnings. In essence, director’s fees can optimize the financial outcomes for the company while providing legitimate access to company funds for the directors.
How Are Director’s Fees Structured and Paid According to Australian Law?
Working Directors
In Australia, director’s fees are typically structured to reflect the nature of the director’s involvement with the company. For working directors who are actively involved in the day-to-day operations, the fees may be provided in addition to their salaries and can include the legally mandated superannuation contributions. This arrangement is designed to compensate them for their managerial roles as well as their responsibilities on the board.
Non-Working Directors
For non-working or non-executive directors, who do not participate in the daily management but offer strategic guidance and governance, compensation is generally limited to fees only. However, similar to working directors, these fees also encompass superannuation contributions to comply with the Superannuation Guarantee (SG) obligations under Australian law.
All payments, whether to working or non-working directors, must be processed in accordance with corporate governance standards and Australian tax legislation. This involves the accurate calculation and remittance of Pay As You Go (PAYG) withholding taxes and reporting to the Australian Taxation Office (ATO) using Single Touch Payroll (STP). The payment of director’s fees must also be approved by the company’s board and recorded in the minutes, reflecting a clear and formalized compensation agreement that aligns with the company’s constitution and shareholders’ agreements.
By following these guidelines, companies ensure that the structure and payment of director’s fees meet the statutory requirements and uphold the principles of transparent and responsible corporate governance.
Benefits of Paying Director’s Fees for the Director and the Company
Tax Planning Opportunities
Director’s fees offer a flexible compensation method that can be used effectively for tax planning, often resulting in a more tax-efficient strategy for both the director and the company.
Tax Deductions for the Company
The payment of director’s fees is generally an allowable deduction for the company, potentially reducing its taxable income.
Compliance with ATO Regulations
Structuring director’s fees in accordance with Australian Tax Office (ATO) regulations ensures compliance, thereby avoiding potential penalties and interest.
Flexibility in Compensation
Director’s fees can be adjusted based on the company’s performance and director’s involvement, and can be provided alongside a salary for executive directors, offering greater flexibility in remuneration packages.
Superannuation Contributions
Fees paid to directors, including non-executive directors, can include superannuation contributions, providing a benefit for the director’s retirement fund.
Simplified Tax Reporting
Using the Single Touch Payroll (STP) system simplifies the tax reporting process, making it easier for the company to meet reporting obligations.
Transparent Remuneration
Director’s fees provide a clear and transparent means of remuneration, reflecting the value of the directors’ expertise and governance roles.
Tax Consequences
For the Company
Tax Deductibility
Paying director’s fees is tax-deductible for the company, reducing its net taxable income and lowering the amount of company tax payable.
Cash Flow Advantage
Companies can claim director’s fees as a tax deduction in the year they are intended to be paid, providing a cash flow advantage if they can demonstrate the intention to pay.
Withholding PAYG Tax
The company must withhold Pay-As-You-Go (PAYG) withholding tax from director’s fees and report it to the ATO. Failure to do so can result in the company not being able to claim the fees as a tax deduction.
Superannuation Obligations
Superannuation contributions at a rate of 11% must be paid on director’s fees. This ensures compliance with superannuation requirements.
BAS Reporting
Directors’ fees need to be reported on the company’s BAS (Business Activity Statement) and filed with the ATO as per Single Touch Payroll rules.
Fringe Benefits Tax (FBT)
If directors receive fringe benefits, these must be reported in the company’s annual FBT return.
WorkCover Insurance
Companies must ensure that directors have adequate WorkCover insurance for insurance purposes.
For the Director
Assessable Income
Director’s fees form part of the director’s assessable income and are taxed at their individual tax rate.
Accessing Income Information
Director’s fees form part of the director’s assessable income and are taxed at their individual tax rate. Directors can access their income information, including the amount earned and tax withheld, through their myGov account, thanks to Single Touch Payroll (STP) reporting by the company
Contract Arrangements
If director’s fees are paid through a contract arrangement, they are treated as a salary, with PAYG tax withheld on the gross amount and a superannuation rate of 11%.
It’s important for both the company and the director to adhere to these tax obligations and reporting requirements to ensure compliance with Australian tax laws. Consulting with a tax professional can be beneficial to navigate these obligations effectively
Challenges and Considerations
When a company pays director’s fees to a director, there are several important challenges and considerations to keep in mind. Here’s a breakdown of these key points:
Documentation and Reporting
Proper documentation and reporting are essential when it comes to paying director’s fees. All payments to directors should be well-documented and clearly outlined in written contracts. This documentation not only helps in complying with legal requirements but also demonstrates transparency in financial transactions.
PAYG Withholding
Calculating the correct PAYG (Pay As You Go) withholding for director’s fees is crucial. The withholding amount depends on the director’s individual tax circumstances and should adhere to the ATO’s guidelines. Accurate withholding is necessary to avoid potential tax issues for both the company and the director.
Superannuation
Directors may be entitled to superannuation contributions. It’s important for the company to carefully calculate and contribute the required superannuation amount by Australian law. Compliance with superannuation obligations is vital to avoid penalties and ensure the director’s financial well-being.
In addition to these considerations, it’s worth noting that directors’ fees can be claimed as a tax deduction in the year they are paid or intended to be paid, provided that the company has correctly withheld and reported PAYG tax to the ATO. Proper reporting and compliance with tax obligations are crucial to ensure that director’s fees are tax-deductible and that all legal requirements are met.
Case Study : Director’s Fees for Small Business Owner
Liam is a sole director of “Liam’s Landscaping Pty Ltd”, offering landscaping services. The company has several ongoing projects and has been profitable this year.
Aside from his operational duties, Liam undertakes strategic planning and decision-making for the company. For these responsibilities, he decides to pay himself director’s fees.
The director’s fees compensate Liam for the high-level management and strategic input he provides. This payment is in addition to any salary for operational work he might take.
The director’s fees are an expense for the business, reducing its taxable profit. Liam needs to declare this as income on his income tax return, but he can also potentially claim deductions for any expenses related to his directorial duties.
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Frequently asked questions
How are director’s fees different from a salary?
Director’s fees are payments for board-related duties, whereas a salary compensates for managerial or operational roles within the company.
Can director’s fees be paid to both executive and non-executive directors?
Yes, both executive and non-executive directors can receive director’s fees, though they are more common for non-executive roles.
Are director’s fees a tax-deductible expense for the company?
Yes, director’s fees are generally deductible for the company when documented and reported correctly.
How are director’s fees taxed for the director?
Fees are considered ordinary income and taxed at the director’s marginal tax rate. The company must withhold PAYG tax and may also need to make superannuation contributions.
How are director’s fees considered a form of withdrawing funds from the company?
Director’s fees are another method by which funds are taken out of the company, albeit typically less frequently than salaries. These fees are paid out as compensation for board members’ governance roles and are recorded as a transaction that reduces the company’s profits. Since director’s fees are often approved by the board, they also involve a formal process of withdrawal from company funds.
What are the reporting requirements for director’s fees?
Director’s fees must be reported through the company’s Single Touch Payroll (STP) system to the ATO, along with other forms of compensation.
Is there a cap on the amount a company can pay in director’s fees?
There’s no specific cap, but fees should be reasonable and justifiable based on the director’s role and market standards.
How can we ensure compliance with ATO regulations when paying director’s fees?
Compliance can be ensured by proper documentation, correct calculation of PAYG withholdings, and reporting via STP. It is often best to consult with a tax professional.
Do director’s fees affect the director’s superannuation contributions?
Yes, the company may be required to make superannuation contributions on the director’s fees, which should be factored into the total remuneration package.
Should I pay myself a director's fee?
Deciding whether to pay yourself a director’s fee depends on several factors including your company’s profitability, tax position, and your personal income needs. We conduct a comprehensive tax planning session to determine the most efficient way to compensate you for your directorial role, ensuring that the fee is reasonable and doesn’t negatively impact your company’s financial health.
How much director's fee should I pay myself?
The amount you should pay yourself as a director’s fee must be reasonable and justifiable in relation to the company’s financial performance and your duties as a director. It should not be excessively high, especially if the company is not making enough profit. We can help analyze your company’s financial statements and provide guidance on an appropriate fee that maximizes tax efficiency.
Can I pay director's fees if my company is making a loss?
It is generally not advisable to pay director’s fees if your company is incurring losses, as this would increase the company’s financial burden and trigger tax obligations unnecessarily. However, each situation is unique, and we can help you evaluate the best course of action based on a detailed review of your company’s finances.
What are the tax implications of paying myself a director's fee?
Paying a director’s fee has tax implications both for you and your company. The company can typically deduct the fee as a business expense, while you must report it as personal income. There are withholding tax requirements to consider as well. Our team can assist you in structuring director’s fees to ensure compliance and optimize tax outcomes.
How can you assist me in setting up and managing director’s fees?
We provide expert advice on structuring director’s fees to comply with tax laws while considering your individual and company’s financial situation. Our services include managing the setup, handling the reporting process, and conducting ongoing reviews to adapt to any changes in tax legislation or company circumstances, ensuring that your remuneration strategy remains effective and compliant.