A director (or a person who performs the duties of a director) is deemed an employee for PAYG withholding tax purposes; that is, payments made to a director by a company as remuneration are subject to PAYG tax instalment deductions. Ironically, if the instalments are not deducted, the director of the company may be personally liable or be subject to a penalty.
The Australian Taxation Office (ATO) recognises that some companies may have made payments of directors’ fees, bonuses before or at the end of the financial year. In that event, the amounts paid are allowable tax deductions in the tax return for that year.
In some cases, the directors’ fees may not be paid by the end of the financial year. In these cases, to qualify for a tax deduction, the company must, before the end of the income year, become definitively committed to the payment of a qualified amount. However, the ATO acknowledges that these amounts may not be paid until some months into the following financial year. In these cases, although the tax deduction will be allowable in the year that the fees are definitively committed, the obligation to withhold tax instalments from these amounts arises at the time the amounts are paid.
The ATO is targeting certain arrangements involving the accrual of directors’ fees at the end of the income year. The arrangements are as follows:
- Before the end of the financial year, the directors resolve that directors’ fees of a specific amount will be payable to the directors of the company. Directors’ minutes reflect that the company is immediately, definitively and irrevocably committed to the liability in respect of those directors’ fees.
- The directors resolve that directors’ fees be paid at a time to be determined having regard to future cash flows and that amounts be held in a directors’ fees payable account until payment is or can be made.
- The company claims a tax deduction for the directors’ fees in the year of resolution but makes no payment to directors at all.
- The directors do not include any amount in their assessable income until such time as the company pays an amount to them.
- Contrary to directors’ resolutions, the company makes nil or minimal payments to the directors despite the company declaring profits and, in some instances, making loans to the directors.
The ATO’s general position is that directors’ fess accrued in one financial year will only be deductible in that financial year, if the fees are definitively committed and are paid to the directors in the following financial year. Furthermore, directors’ fees are not deductible if the directors’ fees are indefinitely accrued and never paid.
Companies should also be aware that they must pay superannuation guarantee contributions in respect of remuneration paid to directors.
Lastly, some directors claim that their company or trust is engaged to supply a director. The corporations law does not allow such entities to be a director – only an individual can be a director.