Accruing directors’ fees is a tax deferral strategy as the company receives a tax deduction in one financial year, but the related party (directors), are not taxed on the income till the following financial year.
A company is entitled to claim a deduction in one financial year, say 2016, for directors’ fees if it is definitely committed to paying those directors fees at 30th June 2016. This commitment will be evidenced by a properly written authorised shareholders resolution that has been passed prior to 30th June 2016 (refer IT 2534). Under the Corporations Act 2001 only the shareholders of a company can authorise the payment of directors’ fees. Of course, for most small companies the passing of the shareholder resolution is just a formality.
The directors receiving the directors fees are not taxed on them until they are actually received, which will be the following financial year (2017 in this example). Directors’ fees are normally paid by making a payment from the company bank account as per normal employee wages, or crediting the directors’ loan account. Crediting the directors’ loan account creates a liability for the company and allows the directors to draw down this money tax free at a future time convenient to them.
Irrespective of whether the directors’ fees are actually paid in cash from the company bank account, or credited to the directors’ loan account, both payments will be subject to the normal employee PAYG with-holdings and superannuation guarantee requirements.
The ATO have issued TA 2011/4 which deals with unpaid directors fees. The ATO have advised that directors’ fees accrued in one financial year will only be deductible in that financial year, if they are paid out and assessed to the directors in the following financial year. That is, directors’ fees are not deductible if indefinitely accrued and never paid.