Are Director Fees the Same as a Salary?

Unlike employees, there is generally flexibility in how directors receive their compensation – they can either receive director fees, dividends, or a salary.

There are three methods of remunerating directors: salary, director fees, and dividends. Each method involves different rules, regulatory compliance, and tax considerations.

In most cases, a salary would seem like the most straightforward approach.

But how does it differ from receiving a dividend? Or director fees?

Is one option better than the other?

Can directors receive all three compensation methods?

Let’s find out.

How Can Company Directors Be Compensated?

There are three main ways that company directors in Australia can be compensated for their services: through salary, director fees, and dividends.

When Does a Company Director Receive a Salary?

A director’s salary is paid to executive directors who are actively involved in managing the company on a day-to-day basis. Executive directors perform employee duties in addition to their board responsibilities. Like other employees, director salaries are subject to PAYG withholding, and the company must pay a Superannuation Guarantee on their behalf.

In terms of how much a director should be paid, there are no legal requirements on salary amounts. Instead, the compensation is set by the board or shareholders and is based on market rates and the director’s responsibilities, qualifications, and experience.

Non-executive directors typically do not receive a salary because they’re not involved in the day-to-day management or operations of the company. Rather, they serve on the board in an oversight and advisory capacity.

Instead of a salary, non-executive directors receive compensation in the form of annual director fees.

What are Director Fees?

Directors fees are a separate form of compensation paid to members of the board of directors in Australia, in addition to any salaries directors may receive. Director fees specifically reward directors for their services related to governing and overseeing the company through their work on the board.

Non-executive directors, typically rely more heavily on directors fees as their primary compensation.

In most cases, director fees are paid as a flat annual amount or on a per-meeting basis, for example, $50,000 per year or $2,000 per board meeting attended.

For public companies, shareholder approval is often required for director fees, and the process is typically outlined in the company constitution or a shareholder agreement. These documents provide the legal framework for approving and structuring director remuneration, ensuring compliance with tax reporting and shareholder approval procedures.

In private companies, the amount of director fees is usually set by the board, but this process is governed by the company constitution or a shareholder agreement, which specify how director compensation should be approved and paid.

What are Dividend Payments?

Directors who hold shares in the company are entitled to dividend payments on those shares, subject to the discretionary dividend decisions made by the board. Dividends are profits paid out to shareholders and are taxed differently than salaries and fees.

As shareholders, directors can participate in company profits through dividends. 

How Do These Compensation Methods Interact with One Another?

Director fees and dividends are the two compensation methods most directly tied to the director’s board duties. As outlined above, director fees reward the governance, oversight, and advisory services directors provide to the company through their work on the board.

Dividends compensate directors in their capacity as shareholders, allowing them to share in company profits.

Salaries, on the other hand, are only paid to directors who take on additional roles and responsibilities in actively managing the company.

Each of these compensation methods has different tax implications and tax treatment. Understanding how each is taxed and the compliance requirements involved is essential for effective financial planning and minimising tax liability.

Directors Fees and Tax Compliance

Directors fees in Australia are subject to specific tax and compliance rules. Unlike regular salaries, directors fees are treated as personal services income and taxed at the director’s individual marginal rate.

Tax Withholding and Reporting Obligations

Companies have a responsibility to withhold tax from directors fees under PAYG and report these payments to the ATO. Each year, a PAYG payment summary must be provided to directors by 14 August, showing the total gross directors fees paid and any tax withheld. This ensures both the company and the director remain compliant with ATO requirements.

While directors fees are income to the individual, they can generally be claimed by the company as a business expense, provided they meet ATO conditions and are in line with the company’s constitution or board agreements.

Director Responsibilities

Directors must include the full pre-tax amount of directors fees in their personal tax returns as assessable income. They may then apply eligible deductions and offsets to determine their final tax liability. The ATO also considers directors fees when assessing entitlements for Centrelink payments, which may affect the director and their partner.

Failure to report directors fees accurately can result in penalties. The ATO cross-checks company reports with individual returns, and discrepancies may trigger audits or further action.

Superannuation and Fringe Benefits

Directors fees are generally subject to superannuation guarantee contributions, which must be paid into a complying super fund or retirement savings account. In addition, any allowances or non-cash perks provided to directors may fall under fringe benefits tax (FBT), requiring separate reporting by the company.

Understanding how directors fees are taxed, reported, and disclosed is essential for both companies and directors. Companies must ensure accurate reporting, superannuation contributions, and FBT obligations, while directors must declare all fees as income in their tax returns. Proper compliance reduces the risk of penalties and helps directors manage their tax liability effectively.

Key Takeaways

• Directors can be compensated through salary, director fees, and dividends. Salary is for executive directors, while non-executives receive fees.
• Director fees reward governance and oversight work on the board. They are taxed differently than salaries.
• Dividends allow directors, as shareholders, to share in company profits.
• Fees and dividends relate to the director’s board duties. The salary is for additional management responsibilities.

For professional advice on director fees, superannuation contributions, FBT, payroll tax, and other related matters, don’t hesitate to contact KNS Accountants and Business Advisors. Our team of experienced accountants and business advisors can provide you with tailored advice that meets your unique needs and circumstances.

FAQs

Can You Accrue Directors Fees?

Yes, director fees can be accrued in Australia. Accrual allows directors fees to be recognised as expenses and liabilities in the company’s accounts before they are actually paid out.

The fees are accrued over the period they are earned by directors. At year end, the full annual fees are accrued as a liability, even if unpaid. Accrual is optional but provides a more accurate picture of company expenses and director compensation.

Are Directors Fees Subject to Payroll Tax?

Taxable wages include remuneration to a company director, whether they are working or non-working. Therefore, director fees are subject to payroll tax, so they must be recorded for payroll tax purposes to be ATO compliant.

Do Company Directors Have to Pay Superannuation?

Companies that pay directors salaries and/or director fees must comply with the Superannuation Guarantee (SG) requirements. However, they won’t have to factor in any dividend returns when calculating the SG amount because these are not consider ordinary time earnings. 

Can You Claim a Tax Deduction for Director Fees?

Directors themselves don’t claim a tax deduction, but companies who pay directors fees can, provided they meet certain requirements. It’s worth noting, however, that directors can claim deductions for expenses that directly relate to earning the director fees.

Common deductible expenses include travel costs for attending board meetings, director training courses, subscription fees for professional institutes, and home office expenses for work performed at home.

Unlike employees, there is generally flexibility in how directors receive their compensation – they can either receive director fees, dividends, or a salary. 

In most cases, a salary would seem like the most straightforward approach. 

But how does it differ from receiving a dividend? Or director fees? 

Is one option better than the other? 

Can directors receive all three compensation methods?

How does the preferred payment method impact compliance requirements?

Let’s find out.

How Can Company Directors Be Compensated?

There are three main ways that company directors in Australia can be compensated for their services – through salary, director fees, and dividends.

When Does a Company Director Receive a Salary?

A director’s salary is paid to executive directors who are actively involved in managing the company on a day-to-day basis. Like other employees, director salaries are subject to PAYG withholding, and the company must pay a Superannuation Guarantee on their behalf. 

In terms of how much a director should be paid, there are no legal requirements on salary amounts. Instead, the compensation is set by the board or shareholders and is based on market rates and the director’s responsibilities, qualifications, and experience.

Non-executive directors typically do not receive a salary because they’re not involved in the day-to-day management or operations of the company. Rather, they serve on the board in an oversight and advisory capacity.

Since non-executive directors do not actively manage the company, they do not receive a salary.

Instead of a salary, non-executive directors receive compensation in the form of annual director fees. 

What are Director Fees?

Directors fees are a separate form of compensation paid to members of the board of directors in Australia, in addition to any salaries directors may receive. Director fees specifically reward directors for their services related to governing and overseeing the company through their work on the board.

Non-executive directors, typically rely more heavily on directors fees as their primary compensation.

In most cases, director fees are paid as a flat annual amount or on a per-meeting basis, for example, $50,000 per year or $2,000 per board meeting attended. 

For public companies in Australia, shareholder approval must be obtained at a general meeting for the total pool or cap on director fees to be paid. Private companies, on the other hand, set the director fee amounts in their constitution without needing shareholder approval.

What are Dividend Payments?

Directors who hold shares in the company are entitled to dividend payments on those shares, subject to the discretionary dividend decisions made by the board. Dividends are profits paid out to shareholders and are taxed differently than salaries and fees.

As shareholders, directors can participate in company profits through dividends. 

How Do These Compensation Methods Interact with One Another?

Director fees and dividends are the two compensation methods most directly tied to the director’s board duties. As outlined above, director fees reward the governance, oversight, and advisory services directors provide to the company through their work on the board. 

Dividends compensate directors in their capacity as shareholders, allowing them to share in company profits.

Salaries, on the other hand, are only paid to directors who take on additional roles and responsibilities in actively managing the company. 

So, directors who only serve on the board in a non-executive oversight capacity would generally not receive a salary. Their remuneration would be limited to director fees and dividends.

On the other hand, executive directors take on management responsibilities on top of their board duties. They would therefore be compensated with both a salary reflecting their management role, as well as director fees and potentially dividends for their board services and share ownership.

Directors Fees and Tax Compliance

Director fees are subject to specific tax liability rules and compliance obligations in Australia.

While salaries have PAYG tax withheld by the company, directors themselves are responsible for declaring and paying tax on fees.

Director fees are taxed as personal services income. They don’t have PAYG instalments deducted by the company before payment. Instead, directors must include the fees in their personal tax return and pay tax at their applicable marginal income tax rate.

To assist with compliance, companies paying directors fees must provide an annual PAYG payment summary to each director by August 14 each year. This summarises the total gross director fees paid over the financial year.

Directors must then report this amount in their individual tax returns. The full pre-tax amount of fees should be included as assessable income. The director can then claim related deductions and offsets and calculate the overall tax liability payable.

There are penalties for directors who fail to properly declare their fees as income. The ATO requires disclosure and matches fees reported by companies to amounts declared by directors. Unexplained discrepancies can trigger audits and potential legal action.

Key Takeaways 

• Directors can be compensated through salary, director fees, and dividends. Salary is for executive directors, while non-executives receive fees.
• Director fees reward governance and oversight work on the board. They are taxed differently than salaries.
• Dividends allow directors, as shareholders, to share in company profits.
• Fees and dividends relate to the director’s board duties. The salary is for additional management responsibilities.

For professional advice on director fees, superannuation contributions, FBT, payroll tax, and other related matters, don’t hesitate to contact KNS Accountants and Business Advisors. Our team of experienced accountants and business advisors can provide you with tailored advice that meets your unique needs and circumstances.

FAQs

Can You Accrue Directors Fees?

Yes, director fees can be accrued in Australia. Accrual allows directors fees to be recognised as expenses and liabilities in the company’s accounts before they are actually paid out.

The fees are accrued over the period they are earned by directors. At year end, the full annual fees are accrued as a liability, even if unpaid. Accrual is optional but provides a more accurate picture of company expenses and director compensation.

Are Directors Fees Subject to Payroll Tax?

Taxable wages include remuneration to a company director, whether they are working or non-working. Therefore, director fees are subject to payroll tax, so they must be recorded for payroll tax purposes to be ATO compliant.

Do Company Directors Have to Pay Superannuation?

Companies that pay directors salaries and/or director fees must comply with the Superannuation Guarantee (SG) requirements. However, they won’t have to factor in any dividend returns when calculating the SG amount because these are not consider ordinary time earnings. 

Can You Claim a Tax Deduction for Director Fees?

Directors themselves don’t claim a tax deduction, but companies who pay directors fees can, provided they meet certain requirements. It’s worth noting, however, that directors can claim deductions for expenses that directly relate to earning the director fees.

Common deductible expenses include travel costs for attending board meetings, director training courses, subscription fees for professional institutes, and home office expenses for work performed at home.