There’s no doubt that understanding the rules governing directors’ fees can be confusing.

And while claiming these costs as a deduction will lower your overall tax liability – which is great news for your business bottom line – it’s vital to understand your obligations regarding the Australian Taxation Office’s (ATO) requirements.

From what they are, to ensuring you are tax compliant, here’s everything you need to know to navigate the complex issue of directors’ fees.

What are directors’ fees and how are they paid?

Directors’ fees are compensation paid for services performed as a company director.

These fees are usually paid in one of three ways:

• Salary: executive directors who work in the company are paid a regular salary or agreed executive remuneration structure for their service, which must include 9.5 per cent superannuation
• Fee: non-executive directors, or those who do not perform employee duties, are paid fees, which also attract 9.5 per cent superannuation
• Dividend: a director can also receive compensation in the form of a dividend, which is a portion of a company’s profit paid to shareholders in return for their investment.

It’s important to be aware that the Corporations Act 2001 stipulates directors’ fees can only be paid if the company’s constitution allows it, or with formal shareholder approval.

Are directors’ fees tax deductible?

Director’s fees can be claimed as a tax deduction in the year they are paid – or in the year they are intended to be paid.

This means a company can gain a cash flow advantage by claiming the fees as a tax deduction before payment, provided the intention to pay can be proven.

Boards will often pass resolutions to this effect just before the end of financial year, in order to claim as-yet-unpaid directors’ fees as a deduction for that period.

These fees must be paid as soon as practicable.

What are the tax obligations for directors’ fees?

Directors’ fees can only be claimed as a tax deduction if PAYG has been correctly withheld and reported to the ATO.

If this is not done, these fees will be deemed non-compliant by the ATO.

To meet this requirement, a company must prepare the payroll for the directors’ fees and withhold PAYG tax from the gross amount.

Superannuation must also be paid at a rate of 9.5 per cent.

Directors’ fees have to be reported on the company’s BAS statement and filed to the ATO according to the Single Touch Payroll rules.

The company must also provide a payment summary to the director outlining how much they have been paid and how much tax has been withheld.

Additionally, if the director has received fringe benefits, these must be reported in the company’s annual fringe benefits tax (FBT) return.

A company is also obliged to ensure directors have adequate WorkCover for insurance purposes.

How do you report directors’ fees on your tax return?

Directors’ fees form part of an individual’s assessable income and are taxed at their individual tax rate.

To report the amount earned and tax withheld in their tax return, directors use the payment summary companies are required to provide.

If fees are being paid through a contract arrangement, they are treated as a salary, with PAYG withheld on the gross amount, and a superannuation rate of 9.5 per cent.

Want to know more about director’s fees?

LDB Group can help you learn more about the procedural rules surrounding directors’ fees. Our experts can advise you on the right steps to ensure you fulfill your obligations.

To find out more, contact us by phoning (03) 9875 2900 or sending us details via the contact form below.