Understanding Director Fees: Best Practices and Compliance Guidelines

November 1, 2024

Simon Madziar

Simon Madziar

Director Fees: What you need to know about compliance and tax

 

Director Fee Facts

  • Director fees are paid to members of a company’s board of directors or owners of private companies.
  • Can be paid in cash, shares or other forms of remuneration.
  • Directors are not employees so no salary.
  • Amount of director fee determined by company’s constitution or board resolution.
  • Must be reported as income on your personal tax return.

As a director you need to know the rules and regulations around director fees to be compliant and avoid any tax surprises. Here are some more to consider:

What are Director’s Fees and Why

Director's fees serve as compensation for the valuable services rendered by board members, recognising their expertise and leadership within the company.

Companies need to understand their payroll tax obligations when director’s fees don’t comply with tax rules and minimise financial risk.

To be compliant you need to complete the director’s fees form and account for gross director’s fees.

Tax Treatment of Director’s Fees

The Australian Taxation Office (ATO) treats director’s fees as a tax deductible business expense which can be a big relief for companies. Directors fees paid must be included in payroll tax calculations and treated as wages for compliance with tax and insurance requirements, underscoring the necessity for accurate reporting and adherence to regulations regarding director compensation. This means companies can reduce their taxable income by claiming these fees and therefore lower their tax liability.

Companies can claim director’s fees in the same financial year they are paid so it’s important to plan and manage your finances properly.

Also when a company pays director’s fees to an individual director, the company needs to withhold Pay-As-You-Go (PAYG) withholding tax. This withholding tax ensures the director’s tax is paid at the source. It’s important for companies to keep accurate records and comply with these rules to avoid any issues with the ATO.

PAYG Withholding

Pay-As-You-Go (PAYG) withholding is a tax system to help employees manage their tax better. By deducting tax from payments made to employees and directors throughout the year, this system prevents individuals from having a big tax bill at the end of the financial year. This makes tax payment easier for employees and encourages good financial management.

For companies there are specific PAYG withholding obligations. They must ensure they withhold the correct amount of PAYG tax from director’s fees as part of their compliance requirements. Also businesses must report these withholdings on their Business Activity Statements (BAS) and provide payment summaries to their directors at the end of the financial year. This paperwork is important for transparency and for the company and its employees to be tax compliant.

Directors’ fees Deductibility

A formal board resolution is in place that approves the payment. This resolution must state the terms of the fees so it’s transparent and compliant. Paid directors fees must comply with taxation regulations for both non-executive and executive directors. The payment must also be made in accordance with the company’s constitution which outlines the rules and regulations of the company and any existing shareholder agreements that may govern how director’s fees are to be handled. All these will ensure the payment is justified and properly documented so it’s deductible for tax purposes.

Directors’ fees are deductible for the company which means these expenses can be subtracted from the company’s gross income. This reduces the company’s net taxable income so they can report lower profits for tax purposes. This means less company tax payable. By managing director’s fees properly businesses can reduce their tax liability and still pay their directors fairly for their work and responsibilities.

Companies Paying Director’s Fees

Companies paying director’s fees must comply with many compliance requirements for transparency and accountability. These include the specific rules in the company constitution and shareholder agreements which may govern how the fees are structured and approved. Also companies must consider payroll tax implications of these payments and fringe benefits that may affect the directors and the company’s financial position. Knowing these rules is important for good corporate governance.

Tax planning is key to minimising tax on director’s fees. By structuring their income and knowing the tax laws directors can claim all the tax deductions and credits available to them. This proactive approach not only reduces their overall tax liability but also allows them to keep more of their hard earned money. Also it allows them to plan for their future financial goals and investments so they are ready for any changes in tax laws that may affect their financial position. Overall tax planning is an important part of financial management for directors and the benefits are long term.

Compliance Obligations for Companies

Companies paying directors’ fees must adhere to various compliance obligations to ensure they are meeting their tax and regulatory requirements. These obligations include:

  • Withholding Pay-As-You-Go (PAYG) Tax: Companies must withhold PAYG tax from directors’ fees and report it to the Australian Taxation Office (ATO). This ensures that the tax is paid at the source, reducing the risk of underpayment.
  • Reporting on Business Activity Statement (BAS): Directors’ fees must be reported on the company’s BAS and payment summaries. Accurate reporting is crucial for transparency and compliance.
  • Payroll Tax Obligations: Director’s fees are considered taxable wages and must be included in payroll tax calculations. Companies must comply with payroll tax obligations, including reporting requirements and WorkCover insurance.
  • Fringe Benefits Tax (FBT) Compliance: When fringe benefits are offered to directors, companies are required to adhere to FBT regulations and disclose these benefits on their annual FBT tax return.
  • Maintaining Accurate Records: Companies must keep detailed records and working papers to support the payment of directors’ fees and related tax obligations. This documentation is essential for audits and ensuring compliance.

Failure to comply with these obligations can result in penalties, interest, and reputational damage. Companies should consult with a qualified professional to ensure they are meeting their compliance obligations and minimizing financial risks.

Payroll Tax Obligations

Director’s fees are payroll tax and companies must treat them as wages and include them in the payroll tax calculation.

Compliance to payroll tax obligations, including accurate reporting and WorkCover insurance, is crucial for companies disbursing director’s fees..

Payroll tax rates vary by state and territory and companies must make sure they are compliant.

Can a director get director’s fees and wages?

Yes directors can get both director’s fees and wages as their role may involve both management and board responsibilities.

But the ATO will closely look into these arrangements to make sure they are in line with the company’s constitution and shareholder agreements.

Directors must also manage their tax properly in these situations and have proper documentation and compliance with all laws and regulations.

Reporting Director’s Fees on Personal Tax Returns

Director’s fees are part of a director’s assessable income and taxed at their personal tax rates. Directors must acknowledge that these fees are for their services and must be reported correctly to comply with tax laws.

When directors get payment summaries from the company, these documents have all the information that must be used to report the payments received and any tax withheld by the company. This is for transparency and accuracy in financial reporting.

Also directors must report their fees in their personal tax returns which is part of their tax obligations. They must pay tax at their marginal tax rate which varies depending on their total income. By knowing these requirements directors can manage their tax properly and avoid penalties.

Strategies for Company Directors to Minimise Tax

Tax planning can help directors to get their tax position right and maximise their post tax income and benefit from all the tax deductions and credits to reduce their overall tax liability. Contributing to retirement savings accounts can also effectively reduce taxable income and minimize overall tax liability.

Strategies like smart payment timing and using super funds to pay director’s fees and superannuation contributions can achieve this while being compliant and reducing tax.

Best Practices for Company Directors

Company directors have a range of responsibilities, including overseeing the company’s operations, making strategic decisions, and ensuring compliance with regulatory requirements. To ensure they are meeting their obligations, company directors should:

  • Understand Their Role and Responsibilities: Directors should be fully aware of their duties and liabilities, including their fiduciary responsibilities and the need to act in the best interests of the company.
  • Ensure Fair Compensation: Directors should receive fair compensation for their services, including directors’ fees and superannuation contributions. This compensation should be in line with the company’s constitution and shareholder agreements.
  • Keep Accurate Records: Maintaining accurate records of income and expenses, including payment summaries and tax returns, is essential for compliance and financial management.
  • Comply with Tax Obligations: Directors must pay tax on their directors’ fees and report any fringe benefits. Understanding and meeting these tax obligations is crucial to avoid penalties.
  • Seek Professional Advice: Consulting with tax and regulatory professionals can help directors navigate complex tax laws and ensure they are meeting their obligations.
  • Optimize Their Tax Position: Directors should consider their overall tax position and seek advice on how to optimize their tax outcomes. This may include strategies like smart payment timing and using super funds to pay directors’ fees and superannuation contributions.

By following these best practices, company directors can ensure they are meeting their obligations, minimizing their tax liability, and effectively managing their financial responsibilities.

Common Mistakes with Director’s Fees

  • Employers don’t declare director’s wages in their payroll tax returns.
  • This is a common error in payroll tax audits.
  • Accurate declaration of payments to directors is important as errors can result to underpayment of payroll tax.
  • Underpayment will attract interest and penalty tax.

Summary

In summary directors’ fees and tax implications is important for both companies and directors. Fees can vary greatly depending on the individual’s role, responsibilities and size of the company so all parties must have a clear understanding of the financial situation.

Managing director’s fees is not just about tax compliance but also a comprehensive strategy that takes into account the financial situation of both the directors and the company.

FAQ

Can directors claim tax deductions for expenses incurred in their duties?

Yes, directors can claim tax deductions for expenses incurred while being a director.

What is included in director’s fees?

Director’s fees includes remuneration for attending board meetings, providing strategic advice, overseeing company operations and financials and overall management of the company.

Are directors automatically employees for tax purposes?

No, directors are not automatically employees for tax purposes.

ATO has specific guidelines on how to differentiate between a director as an employee or self employed contractor.

Control over work performed, responsibility for business expenses and ability to delegate tasks can determine if a director is an employee or contractor. It’s important to know the difference to declare taxes correctly.

How much is the director’s fee?

Director’s fee varies and depends on company size and industry, director’s responsibilities and market rates.

Director’s Fees same as Salary?

No, director’s fees and salaries are not the same. Director’s fees are paid to non-executive directors for their time spent on board related duties while a salary is given to executive directors who are actively involved in managing the company’s operations.

Can directors negotiate their fees?

Yes, directors can negotiate their fees based on their experience, qualifications and the complexity of the company they are representing.

Companies also review director’s fees periodically and adjust it accordingly. Directors should have open communication with the company’s board or remuneration committee if they have any concerns or negotiations with their fees. Overall it’s important for both parties to come to a fair and mutually beneficial

 

Need help with accounting, bookkeeping or taxes? Mahler Advisory can help! Click the call button or book an online appointment with us.

Remember this is general advice. Talk to a specialist who knows your situation. This information is current at the time of publication but may change.

Tax laws change so make sure you stay up to date with what you owe. The Australian Taxation Office (ATO) is the best source for the latest details on tax rules and requirements in Australia.

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