Paying directors’ fees can often seem complicated, especially when you’re trying to get your business fully compliant with ATO requirements. Many business owners have similar concerns: should directors be paid? And if so, what’s the right way to handle those payments?
It’s important to get this right because directors’ fees can be claimed as a tax deduction, helping you to reduce your business’s overall tax burden.
However, paying directors’ fees isn’t as simple as just transferring money. There are a few steps you need to follow, and the ATO has specific tax rules for how to report and claim these fees. If you skip these steps, you could miss out on valuable deductions or run into compliance issues.
In this guide, we’ll explain the rules around directors’ fees, how they should be paid, and the right way to claim them for your business.
What Are Directors’ Fees?
Before diving into the rules and procedures, it is important to understand how directors can receive payment. Typically, directors are compensated in one of the following ways:
- Salary
- Directors’ fees
- Dividends
Each method rewards directors for their work but involves different tax implications and compliance requirements.
Why Do Companies Pay Directors’ Fees?
Companies pay directors’ fees to ensure that board members are appropriately compensated for their leadership, insight and strategic decision-making. This remuneration structure ensures transparent and balanced compensation for directors’ valuable input while providing flexibility in both financial management and tax planning. It also helps companies avoid the stringent rules of Section 7A of the Income Tax Assessment Act, which creates a more tax-efficient way for directors to earn income. Essentially, directors’ fees help align the company’s financial goals in a way that is consistent with and beneficial to the directors’ legitimate access to the company’s funds.
How Are Directors’ Fees Structured And Paid Under Australian Law?
Executive Directors
In Australia, the structure of directors’ fees is based on the director’s level of involvement in the company. For executive directors involved in day-to-day business, fees are often paid in addition to their regular salary and must include mandatory superannuation contributions. This setup ensures fair compensation for both their executive duties and board responsibilities.
Non-Executive Directors
Non-executive or non-executive directors, who focus on strategic oversight rather than day-to-day management, usually receive only a director’s fee. However, these fees must also include superannuation contributions in accordance with the Superannuation Guarantee (SG) requirements set out in Australian law.
All payments made to directors – whether executive or non-executive – must comply with corporate governance rules and Australian tax laws. This includes the correct calculation and payment of Pay As You Go (PAYG) withholding tax and reporting to the Australian Taxation Office (ATO) via Single Touch Payroll (STP). In addition, the company’s board must formally approve all director fees and record them in meeting minutes, ensuring that the remuneration is consistent with the company’s constitution and shareholder agreements.
By following these rules, companies maintain transparency when remunerating their directors, meet legal obligations and adhere to strong corporate governance standards.
Director Fees And Salaries: What’s The Difference?
Many business owners often confuse director fees and director salaries or wages. It is important to understand this distinction because each is treated differently when it comes to taxes, legal obligations and retirement.
Director Fees:
These are payments made solely for their role as a director on the board. Directors may not have any other day-to-day work or management duties in the company. This is especially common for non-executive or independent directors who focus solely on governance, not performance.
Director Salary or Wages:
When a director also serves in an executive or operational position (such as CEO, managing director or other senior role), they receive a regular salary or wage for those duties. These payments are processed in the same way as any other employee’s salary.
Sometimes, directors may receive both types of payments – a director’s fee for board work and a salary for management responsibilities. For example, a managing director in a private company often earns both. Always record these separately in your company’s accounts to keep things clear and consistent.
Continue Reading: How Far Back Can the ATO Audit You? Can They Be Avoided?
How Are Director Fees Determined?
The process for determining director fees depends on the structure, size, composition of your company and whether it is privately held or publicly listed.
Private And Small Companies:
In small or private businesses, the board usually determines the amount and how it is paid. This may also be set out in the shareholders’ agreement or company constitution. Directors can set their own fees, provided they are consistent with these governing documents.
Public Companies (e.g. ASX-listed):
For listed companies, shareholders must approve the total pool of director fees during the AGM, as required by the Corporations Act and the company’s constitution.
It is important to ensure that director remuneration is consistent with company policies, market standards and is clearly disclosed to shareholders (and sometimes the public). A transparent and consistent process helps prevent conflicts and supports long-term governance integrity.
Formalising this framework in your constitution or shareholders’ agreement is not only best practice – it also protects your board from future disputes as the company expands or new directors join.
How to Pay Director Fees: A Practical Guide
When paying director fees – whether for yourself as a founder or for non-executive directors – it’s important to follow the correct legal and tax steps.
Get Approval:
Review your constitution or shareholders’ agreement to confirm the appropriate approval process. Then, pass the necessary board or shareholder resolutions.
Set The Amount:
Decide the amount of the fee and how often it will be paid.
Process Through Payroll:
All director fees should be passed through Payroll, even for owner-directors of the business. Register for PAYG withholding if not already done.
Report to The ATO:
Include director fees in your Single Touch Payroll (STP) reporting and issue an income statement or PAYG payment summary.
Think About Superannuation:
If super applies, make contributions in line with employee payments (see “Superannuation on director fees” below).
Keep clear documentation of every decision – record board minutes, maintain payment records and ensure full compliance with tax and employment regulations. Keeping proper records not only meets legal requirements, but also strengthens transparency and accountability in your business.
Conclusion
As a company director, you play an important role and must exercise your authority responsibly to make choices in the best interests of the company. However, the law does not automatically require you to be paid for your work. Your remuneration will depend on your arrangements with the company.
If you need guidance on how to obtain or provide payment for your role as a company director, our skilled commercial lawyers can help through our Truetally Team. For a simple monthly fee, you get unlimited access to lawyers who can answer your questions, draft documents and review agreements.