Many small companies pay Directors Fees to their owners and class these as Directors Fees and should be treated as a Dividend. What is the right way to declare this income!
As a small business Company Director, it is often confusing about when is a payment a wage, directors fee or a Dividend.
Directors wages or Directors Fee?
While these are not wages paid to the staff they are considered to form part of your employer obligations. The Australian Taxation Office will expect to see you pay Super Guarantee Contributions on the Fees ( currently 2017 @ 9.5) . and withhold and remit PAYG withholding tax on these Directors fees in the month or quarter when paid.
The Directors in most cases also the owners of the business should also receive an annual PAYG Summary and remit the amounts on their personal return at item 2. These items are often overlooked for work cover as well, and careful attention should be taken to ensure that all employees obligations are met, and payroll administration and your accounting system are kept up to date.
Directors Fee Vs Dividend?
Payments to Directors, which in many cases refers to Mum and Dad may also be in the form of Directors Drawings. Classifying these as Directors drawings is okay if the Directors are owed money from the Company, this is known as a Directors Loan.
Loan from the Company?
Where the drawing creates a Loan from Director, this is effectively a Division 7A issue and may create headaches for Company and tax problems if not documented as a loan correctly and repaid.
To avoid this, we suggest that the records indicate what is a Directors Fee vs what is a Drawing or a Dividend to Shareholders. Dividends can be Franked, or Unfranked depended upon if the Company has paid tax to allow for the Company to record the tax in a Franking Account.
All small businesses should have a strategy around the area of paying profits to their owners. An approach that minutes and documents Directors entitlements and payment of Dividends avoid the Company not meeting obligations like PAYG withholding obligations.
We are experts at helping clients formulate a strategy in this area.
So what now occurs if you fail to withhold or pay super as a Director.
Extract from ATO website www.ato.gov.au/general/interest-and-penalties/penalties/failure-to-withhold/
In addition to liability for PAYG withholding amounts, directors are personally liable for their company’s unpaid superannuation guarantee charge.
Directors are personally liable for their company’s unpaid PAYG withholding amounts, including estimates of PAYG withholding liabilities. A new director is not liable to a director penalty for company debts that existed when they became a director until 30 days after they became a director.
New directors can be liable for debts outstanding when they begin if they fail to arrange for the company to take necessary action within 14 days of become a director. In addition to estimating unpaid PAYG withholding liabilities, the Commissioner can estimate unpaid superannuation guarantee charge
Where the Commissioner seeks to collect a director penalty, the existing statutory defences are available to a director. [Schedule X, item 2, subsections 269-35(1) to (4A) in Schedule 1 to the TAA 1953] 1.51 Therefore, a director is not liable for a director penalty where they can establish that: because of illness or for some other good reason the director was not involved in the management of the company and it was reasonable for that director not to be involved; or the director took all reasonable steps to ensure the directors caused one of these three things to happen (or no such steps were available): – the company to meet its obligation to pay; – an administrator of the company to be appointed; or – the company to begin to be wound up. [Schedule X, item 2, subsections 269-35(1) and (2) in Schedule 1 to the TAA 1953]
We are happy to discuss this further if you need our help in this area. Its important as a small business person you understand practically your obligations. We can help you know what you need to do!
Please contact me for a confidential discussion – Geoff