How Do Company Directors Get Paid?

In Short

• A director may be paid in one of three main ways: a salary (with employment obligations), director’s fees (for non‑employees with procedural requirements) or dividends (for shareholders).
• Paying a salary triggers employer obligations (minimum wage, leave, superannuation), while fees and dividends may avoid some of those but still bring other legal or tax considerations.
  
• Dividends don’t trigger superannuation or PAYG withholding, but will have tax implications (and the company needs to have made sufficient profits).

Tips for Businesses

Ensure your company has clear agreements outlining how a director is paid, choose a payment method that suits your business structure and cash flow, and always seek advice on tax, employment and superannuation obligations before making payments.

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Table of Contents

• 1. Director’s Salary
• 2. Director’s Fees
• 3. Payment Through Dividends
• Key Takeaways
• Frequently Asked Questions

As a company director, you hold a unique position of power and trust. You are responsible for overseeing the management of the company, being a key decision maker and maintaining proper company records. Broadly speaking, the law does not require directorships to be paid positions. However, there are a few different ways that you can receive an income or payment for your services. This article will explain how a company director can be paid through a salary, director’s fees or dividends.

1. Director’s Salary

Getting paid through a regular salary is a simple and relatively straightforward option. The company is able to hire a person to act as a full-time director as if they were an employee. This means you are taking a hands-on, day-to-day interest in the operation of the company. When the company employs you as a full-time director, there are minimum wage and other employer obligations that must be adhered to, including: 

• providing leave entitlements, such as annual and personal leave.
• paying the national minimum wage or award rate (if applicable);
• making compulsory superannuation contributions;
• withholding PAYG tax; and
• providing leave entitlements, such as annual and personal leave.

Notably, the superannuation guarantee rate will increase by 0.5% each year until it reaches 12% by July 2025. For easy reference, the table below outlines the progression of the guarantee rate.

If you are being hired as a full-time director, there must be an employment/director agreement in place between you and the company. This will outline:

• your roles and responsibilities; 
• remuneration; and 
• the company’s rights to terminate you for cause, such as fraud, misconduct or breach of the employment/director agreement. 

2. Director’s Fees

Director’s fees are effective compensation for the services you perform as a company director. Company directors can gain entitlements to receive director’s fees instead of a salary if they:

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

Alternatively, shareholders can approve a director’s fee as a replaceable rule. This means the fees will apply to the company until replaced by the company’s constitution. Nevertheless, a company constitution can also allow the company to pay you via director’s fees.    

Commonly, a director’s agreement will include provisions outlining: 

• whether a director is entitled to be reimbursed for the above expenses; and 
• the procedure for doing so (i.e. incurring the expense, providing a receipt to the company and then being reimbursed). 

Generally, the law will not classify a director as a company employee. However, directors’ fees may be subject to superannuation. If the company engages you in a contractor’s arrangement, you should determine whether superannuation is payable on the remuneration for your services. This is best discussed with either your tax advisor or a tax lawyer. 

Additionally, companies need to ensure that they meet all of the procedural requirements when paying directors. Generally, courts have held that a director of a company acting as a trustee for a trust will not have any entitlement to remuneration. However, an exception is if the company passes a resolution in a general meeting authorising this entitlement. 

3. Payment Through Dividends

Dividends are payments to shareholders by the company using the company’s profits from a certain period. Directors have the entitlement to receive dividends if they hold shares in the company with the right to receive dividends. If you, as a director, receive dividends, the company does not have to pay superannuation or PAYG withholding on those dividends. However, there are taxation consequences for you and the company if you receive dividends.

The company will need to pay tax on any profits made. Likewise, you may receive a franking or imputation credit for the tax the company paid when issuing you a dividend. If your income is such that the amount of the dividend you receive is being taxed at a lower rate than the company’s tax rate, the Australian Tax Office will refund you the difference. 

Alternatively, if your personal marginal income tax rate is higher than that of the company’s, you will only need to pay tax on the difference. It is important to get tax advice from your accountant before receiving any dividends.

Directors' Duties Complete Guide

If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.

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Key Takeaways

When managing your salary, some challenges require careful consideration to ensure legal compliance and effectiveness, including: 

• Reasonableness of Salary: Your salary should be proportionate to your role, responsibilities and value to the company. 
• Payroll Management: It is crucial to maintain a reliable payroll system to ensure accurate salary payments.
• Cash Flow Impact: You need to plan and budget the director’s pay to ensure it does not affect the company’s cash flow. 
• Performance and Remuneration Link: There must be a clear connection between the director’s pay and their performance in the company to ensure remuneration 
• to the director aligns with the company’s objectives. 
• Record Keeping and Transparency: You should maintain clear documentation of the salary and how it was determined, including any performance metrics used.

If you need advice about receiving or providing payment for services as a company director, our experienced business lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions