As a company director, there are a few different ways that you can receive an income or payment for your services. Below, we look at pay through your salary, directors’ fees or dividends.
If the company employs you in a role other than a director, it can pay you a salary like any other employee, and is required to pay you the superannuation guarantee that is currently at the rate of 9.5%.
Director’s fees are effectively compensation for your services performed as a company director. As a director, you could be entitled to receive director’s fees instead of a salary if you aren’t also an employee of the company, and you satisfy certain procedural requirements.
Your company’s constitution must include a provision allowing the company to pay you via director’s fees, which can include:
- Travelling costs;
- Costs associated with attending meetings; and
- Other expenses incurred in the position of a company director.
Alternatively, shareholders can approve this under Rule 202A of the Corporations Act 2001 (Cth).
Even though a director may not be classified as a company employee, Director’s fees are subject to superannuation and are calculated using ordinary time earnings (OTE). This includes what directors earn as part of services provided for their ordinary hours of work as set out in the relevant agreement they have with the company (e.g. the company constitution or a shareholders agreement). Director’s fees are also subject to payroll tax much like a salary.
Companies need to ensure that they meet all of the procedural requirements when renumerating directors. A director of a company acting as a trustee for a trust will not have any entitlement to remuneration unless the company passes a resolution in a general meeting authorising this (Kelly v Commissioner of Taxation (No 2)  FCA 689). In Kelly v Commissioner of Taxation, the company trustee had deducted superannuation contributions for its directors when the directors were not employees of the company. The court held that the directors were not entitled to these deductions because they had not met the regulatory requirements and did not fall within the scope of the term of ‘employee’ in section 12 of the Superannuation Guarantee (Administration) Act 1992 (Cth).
Payment Through Dividends
Dividends, or distributions, are paid to shareholders by the company using the amount of profits the company generated in a certain period. Directors are entitled to receive dividends if they hold shares that allow this. If a director is paid in dividends, the company does not have to pay the superannuation guarantee as dividends are not included in the calculations of OTE. There are, however, taxation consequences for a director and the company if the director is paid in dividends.
The company will need to pay tax on any profits made, and the director will receive a franking or imputation credit for tax the company paid when issuing the director with a dividend. If your personal tax total is less than the amount of the company’s tax total, the Australian Tax Office will refund you the difference. It is important to get tax advice from your accountant before receiving any dividends.
If you are a company director and are unsure how you will receive payment for your services, it is best to speak with a commercial lawyer and confirm your company is meeting its legal requirements.
Questions about receiving payment for your services as a company director? Get in touch on 1300 544 755.