What Are Director Fees?

Do you need help understanding the complexities of director fees?

We get it— Director fees are a great way to attract and retain top talent for directorial positions. However, these fees  are subject to several rules and tax obligations that you should be aware of as a business owner or aspiring director.

This article simplifies the concept and takes you through the ins and outs of director’s fee implementation in Australia

What is a Director’s fee?

Director’s fees are payments made to individuals serving as directors for overseeing and guiding a company’s operations and strategy.

These fees compensate directors for their time, expertise, and responsibilities, which typically include:

• Setting Company Strategy: Helping to develop and approve the long-term direction and goals of the company.
• Governance and Compliance: Ensuring the company follows the relevant laws and regulations and adheres to high standards of corporate governance.
• Financial Oversight: Reviewing and approving financial statements, budgets, and major financial decisions.
• Risk Management: Identifying and managing risks to the company.
• Stakeholder Engagement: Communicating with shareholders, employees, and other stakeholders.

Additionally, the fees may cover a director’s travel costs and other expenses incurred as a result of the position.

This fee is not the same as a salary and is paid only if the director does not double as an employee. However, a director is not automatically entitled to receive compensation for their services.  Such payments can only be made if the company’s constitution or shareholders permit it.

The importance of Director Fees in Australia

A company director is expected to act in the best interests of the company, using their skills and judgment to make informed and beneficial decisions. Director fees are a way to compensate such individuals for their efforts and ensure their continued willingness to serve the company.

Director fees are especially crucial for small businesses for several reasons, including:

• Attracting Talent: Offering fees helps attract knowledgeable and experienced directors who can provide valuable insights and guidance without the fear of additional expenses.
• Accountability and Commitment: Directors are more likely to take their roles seriously and act responsibly if they are fairly compensated.
• Risk Management: Experienced and dedicated directors can help identify and manage risks, protecting vulnerable small businesses from potential pitfalls and increasing their chances of long-term success.

Overall, director’s fees can help small business like yours access the expertise and oversight needed for good management and successful operation, which may not be your expertise. 

How are Director’s Fees determined?

Director fees in Australia vary and are primarily determined by several factors, including the following:

• The Company Size and Complexity: Larger and more complex companies tend to pay higher fees.
• The Director’s Role and Responsibilities: Fees may vary depending on the individual director’s role and the responsibilities involved. For example, a chairperson’s fees would likely be higher than those of a non-executive director.
• Market Comparisons and Competitor Offerings: Companies often compare fees with similar companies to stay competitive.
• Shareholder Approval: In many cases, shareholders must approve the total amount allocated for director fees at the company’s annual general meeting.
• The Director’s Contract: A director’s contract with a company may contain a specific clause establishing an agreement on fees and entitlements, usually based on the director’s experience and expected responsibilities. In such cases, failure to comply with the payment terms could amount to a breach of contract.

It is important to understand the specific factors at play in your case to ensure that the fees offered are fair to all involved and to stay on top of any applicable tax obligations.

Tax implications of Director’s Fees

When a company pays its directors a director fee, both the company and each director paid may be subject to certain statutory payments, taxes/tax reporting obligations under Australia’s tax laws, including:

• Income Tax: A tax imposed by the government on individuals’ and businesses’ income or earnings.
• Business Activity Statements (BAS): BAS are regular reports that must be submitted to the Australian Taxation Office by eligible businesses to report and pay their tax obligations, including GST, PAYG withholding, and other taxes.
• Pay-As-You-Go (PAYG) Withholding: PAYG covers all payments and taxes an employer must withhold from their employees’ salaries and wages, which they then remit to the Australian Taxation Office.
• Superannuation: Superannuation is a mandatory retirement savings program in Australia, where employers make contributions to a superannuation fund for their employees, which is accessible upon retirement. 

The table below demonstrates how these obligations affect companies and directors paying or receiving director fees:

Failure to fulfil these obligations could result in severe penalties for all involved. If you’re having trouble understanding how to comply, it might be time to contact an experienced tax advisor like Lawpath to ensure you or your business remains on the right side of the law.

How to pay Director’s fees

If you are new to the idea of paying directors fees, you might be wondering where to begin. We know that the process and steps involved can be complex, so we’ve simplified them below:

• Determine Director’s Fees: The first step is to decide on the amount and frequency of the fees. This should align with the company’s financial capability and industry standards.
• Board and Shareholder Approval: Directors’ fees must be approved by the company’s shareholders (usually at a general meeting).

For proprietary companies, fees are often set in accordance with the company’s constitution without needing shareholder approval. In such cases, the director fee structure must be approved by the directors subject to remuneration limits in the constitution.

To obtain the board’s or shareholders’ approval, you’ll need to prepare and present a written proposal outlining the fees, payment schedule, and any applicable performance metrics. The board/shareholders must then pass a formal resolution to approve the fees.

• Documentation: The board’s decision must be recorded as part of the board minutes. The affected directors’ service agreements must be drafted or updated to reflect the approved fee details.
• Payment Processing: Arrange for payment through the company’s payroll or accounting system. Be sure to set up deductions for any necessary taxes that should be withheld and superannuation contributions.
• Compliance Check: Ensure the fees and deductions comply with the relevant laws and the company’s constitution.
• Record Keeping: Keep detailed records of payments made to directors. This would make it easier to prepare financial reports and business activity statements.

If you’re the sole director of your company, the steps involved might be different. Our article on paying oneself as a sole company director can make things easier and help you understand what you need to do.

While establishing a suitable director fee structure, you must be extremely careful to avoid certain potential pitfalls, including:

• Failing to get proper board approval
• Inadequate documentation 
• Non-compliance with legal requirements.

When they occur, these issues can lead to disputes and legal complications that could affect business operations or result in regulatory penalties. Therefore, you must take proactive steps to avoid them and seek professional assistance when necessary.

Setting up the initial fee structure is only the beginning. Life, in general, is not static, so director fees shouldn’t be that way, either. It is important to regularly review and adjust fees based on company performance and market conditions to ensure the rates remain competitive. 

The regulatory landscape is also constantly changing, so it is important to stay updated on legal requirements to avoid non-compliance issues.

Legal considerations for Director Fees

The Corporations Act 2001, Australia’s primary corporate governance statute, generally permits the payment of director fees as long as the shareholders or company’s constitution allows it.

However there are laws that restrict the payment of director fees for certain types of companies. For example, Section 48 of the Charitable Fundraising Act 1991 (NSW) prevents directors of charitable fundraising organisations from receiving remuneration or any other benefits without first obtaining ministerial approval. Paying or receiving director fees without such approval could lead to strict penalties.

Therefore, before paying director fees, it is important to familiarise yourself with the laws and regulations that apply to your specific company and industry. Lawpath’s tax advisory services can help you stay informed with the relevant laws, giving your business the support it needs to thrive.

FAQS 

Is Director fees the same as a salary or wage?

Director fees are not the same as a salary or wage. They are typically compensation for a director’s services on the board, distinct from regular employment income.

 Are director’s fees subject to GST?

Yes, director’s fees are subject to GST if the director is registered for GST, as these fees are considered payment for services provided by the director.

Can a director receive a fee if the company is not profitable?

Yes, a director in Australia can receive a fee even if the company is not profitable, as director fees are primarily determined by the company’s policies and agreements, not its profitability.

How often should director’s fees be reviewed?

While there are no set rules to that effect, director’s fees should be reviewed annually as a best practice to ensure they remain competitive.

The Bottomline on Directors Fees 

Director fees in Australia are an important aspect of corporate governance. They ensure that company directors are fairly compensated for their responsibilities and contributions. 

These fees vary widely based on factors such as the size and complexity of the company and the director’s experience, and they are regularly reviewed to remain competitive and fair. 

Ensuring fair and competitive remuneration is crucial for attracting and retaining talented directors, which ultimately benefits the company’s performance and shareholder value. 

However, directors fees also lead to a variety of legal and tax obligations that could be difficult to navigate.  Lawpath has several tools and resources to help you understand and manage your business taxes to avoid the legal issues and penalties that come with non-compliance. 

We are here to help, and we encourage you to check out our business tax compliance services or reach out to us to discuss your specific needs.