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Company Directors: Dealing with Payments
There are many options to consider when paying a company director. In this article, Fullstack will explain how to pay a company director in Australia.
If you’re a company director in Australia, you may be unsure of how to treat director payments. There are multiple different ways in which an Australian company director can be paid, which include salary, fees, or dividends.
In this article, we’ll break down the different methods that can be used in Australia to pay a company director.
Director Salary, or Director Fees?
Paying a director’s salary is often the most straightforward method of paying a director. If you’re employed in another role alongside the role of director in your company, then your company can pay you in the same way it pays other employees. It’s important to note that you will also need to pay a superannuation guarantee, which is currently set at a rate of 9.5%.
If you’re operating solely as the director of a company, you may want to consider arranging for director’s fees. Director’s fees function as compensation for the services performed by the director of a company – often where a regular wage is not organised via a company’s payroll.
- Many companies choose to operate with a company constitution that in many cases includes provisions allowing for the payment of directors through director’s fees. These fees can include:
- Costs incurred due to meeting attendance
- Travel costs
- Expenses incurred in the position of company director.
It’s also possible for shareholders to approve these fees in accordance with Rule 202A of the Corporations Act 2001 (Cth).
Directors are not necessarily classified as employees of a company, but are still subject to the same superannuation rules — superannuation based on director’s fees are are calculated at 9.5% based on ordinary time earnings, or OTE. This calculation includes any remuneration earned by directors in return for services provided in the ordinary hours of work set out in the relevant agreement they have with the company.
These agreements typically take the form of a company constitution or a shareholders agreement. It’s important to note that director’s fees, like director salaries, are subject to payroll tax.
A company must ensure that it conforms to a range of procedural requirements when paying company directors. The director of a company acting as a trustee for a trust is not entitled to any remuneration — except in the case that the company passes a resolution authorizing the remuneration in a general meeting (Kelly v Commissioner of Taxation (No 2)  FCA 689).
In the case of Kelly v Commissioner of Taxation, the company trustee deducted superannuation contributions for non-employee directors of the company. The directors of the company, according to the court, were not entitled to the deductions because they failed to meet regulatory requirements and thus could not be classified as “employees” under section 12 of the Superannuation Guarantee (Administration) Act 1992 (Cth).
If you’re not sure about the procedural requirements you should follow when paying a director, it’s best to engage the services of a tax professional.
Paying a Company Director Through Dividends
It’s also possible to pay a company director through dividends or distributions paid to shareholders of a company. This remuneration is paid using the profits generated by a company within a specific time period. If directors hold shares in a company, they may be entitled to receive dividends.
If a company chooses to pay a director via dividends, the company is not required to pay the superannuation guarantee — dividends are not included in ordinary time earnings. There are, however, a number of important tax consequences that must be considered when paying a company director via dividends.
A company paying a director through dividends must pay tax on any profits generated. The director may be entitled to a franking or imputation credit for the tax paid by the company when paying a company director through dividends. The ATO will refund the difference if the personal tax loss of the director is less than the total tax amount paid by the company.
Paying a director that is also engaged as an employee via a salary is simple — but paying a director through director’s fees or dividends in Australia can be far more complex. If you’re considering paying a director through fees or dividends, reach out to Fullstack for guidance today.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, crypto and entrepreneurs.