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Re: Director Fees

Initiate

Views 3351

Replies 1

Dear ATO,

 

If we have to pay to a director who sits in the board meeting and spend time doing some work but there's no particular fixed time of ordinary hours or work, is this Director Fee considered normal earnings, i.e. Ordinary Time Earning and attract super guarantee? Or is it considered an Allowance and does not atrract super guarantee because there's no fixed ordinary hours of work?

I read some articles in ATO website surrounding Director Fees but can't seem to find the correct definite answer to my question.

Appreciate your advice.

Thanks!

1 ACCEPTED SOLUTION

Accepted Solutions

Most helpful response

Former Community Support

Replies 0

Hi @Iwiradjaja,

 

Great question... I just wish it was a simple answer Smiley Tongue

 

As a company director, there are a few different ways that you can receive an income or payment for your services.

 

As each payment type has their own tax obligations it's actually up to the company director whether they pay themselves with Director fees, salary/wage or even through Dividends which I’m going to explain below.

 

Frankly, a director should NOT be earning a salary or wage if they are theoretically not employed by the business.

 

Directors’ Salary

If the company employs a director in a role other than a director, it can pay a salary like any other employee. It is also required to pay the superannuation guarantee that is currently at the rate of 9.5%.

 

Directors’ Fees

Directors’ fees are effectively compensation for services performed as a company director. As a director, their entitled to receive directors’ fees instead of a salary if:

  • they are not also an employee of the company; and
  • they satisfy certain procedural requirements.

The company’s constitution must also include a provision allowing the company to pay them via directors’ fees, which can include:

  • travelling costs;
  • costs associated with attending meetings; and
  • other expenses incurred in the position of a company director.

Even though a director may not be classified as a company employee, directors’ fees are subject to superannuation and are calculated using ordinary time earnings (OTE). This includes what directors earn as part of services provided for their ordinary hours of work as set out in the relevant agreement they have with the company.
Directors’ fees are also subject to payroll tax much like a salary.

 

Director's Payment Through Dividends

Dividends, or distributions, are paid to shareholders by the company using the profits the company has generated in a certain period. Directors are entitled to receive dividends if they hold shares that allow this. If a director is paid in dividends, the company does not have to pay the superannuation guarantee as dividends are not included in the calculations of OTE. There are, however, taxation consequences for a director and the company if the director is paid in dividends.

 

The company will need to pay tax on any profits made, and the director will receive a franking or imputation credit for tax the company paid when issuing the director with a dividend. If your personal tax total is less than the amount of the company’s tax total, the Australian Tax Office will refund you the difference. It is important to get tax advice from your accountant before receiving any dividends.

 

 


Furthermore, I answered a similar question a few weeks back that includes a director payment type table which may also provide you more info.

 

I’m also going to include a few links here that you and the director can go through to assess which payment would be better for them considering their other tax obligations:

 

I hope this has helped however if you have any further questions please reply. Have an awesome day!

1 REPLY 1

Most helpful response

Former Community Support

Replies 0

Hi @Iwiradjaja,

 

Great question... I just wish it was a simple answer Smiley Tongue

 

As a company director, there are a few different ways that you can receive an income or payment for your services.

 

As each payment type has their own tax obligations it's actually up to the company director whether they pay themselves with Director fees, salary/wage or even through Dividends which I’m going to explain below.

 

Frankly, a director should NOT be earning a salary or wage if they are theoretically not employed by the business.

 

Directors’ Salary

If the company employs a director in a role other than a director, it can pay a salary like any other employee. It is also required to pay the superannuation guarantee that is currently at the rate of 9.5%.

 

Directors’ Fees

Directors’ fees are effectively compensation for services performed as a company director. As a director, their entitled to receive directors’ fees instead of a salary if:

  • they are not also an employee of the company; and
  • they satisfy certain procedural requirements.

The company’s constitution must also include a provision allowing the company to pay them via directors’ fees, which can include:

  • travelling costs;
  • costs associated with attending meetings; and
  • other expenses incurred in the position of a company director.

Even though a director may not be classified as a company employee, directors’ fees are subject to superannuation and are calculated using ordinary time earnings (OTE). This includes what directors earn as part of services provided for their ordinary hours of work as set out in the relevant agreement they have with the company.
Directors’ fees are also subject to payroll tax much like a salary.

 

Director's Payment Through Dividends

Dividends, or distributions, are paid to shareholders by the company using the profits the company has generated in a certain period. Directors are entitled to receive dividends if they hold shares that allow this. If a director is paid in dividends, the company does not have to pay the superannuation guarantee as dividends are not included in the calculations of OTE. There are, however, taxation consequences for a director and the company if the director is paid in dividends.

 

The company will need to pay tax on any profits made, and the director will receive a franking or imputation credit for tax the company paid when issuing the director with a dividend. If your personal tax total is less than the amount of the company’s tax total, the Australian Tax Office will refund you the difference. It is important to get tax advice from your accountant before receiving any dividends.

 

 


Furthermore, I answered a similar question a few weeks back that includes a director payment type table which may also provide you more info.

 

I’m also going to include a few links here that you and the director can go through to assess which payment would be better for them considering their other tax obligations:

 

I hope this has helped however if you have any further questions please reply. Have an awesome day!