How Do Company Directors Get Paid?

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Table of Contents

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

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. One such example is that the director must also be paid superannuation. 

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

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, director’s 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 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 with 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.

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Key Takeaways

In fulfilling your role as a company director, you have an important position and should ensure that you exercise your authority to make decisions in the company’s best interests. However, remuneration for your work is not necessarily required by law. Instead, it ultimately depends on the type of agreement you have arranged with the company. The three main ways you may be paid as a director are:

• on a yearly salary, which includes superannuation;
• via director’s fees, which do not always guarantee superannuation; and
• through dividends, which do not include superannuation.

If you need advice about receiving or providing payment for services as a company director, our experienced commercial 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.