How to pay yourself as a company director in Australia

Confused about the best way to pay yourself as a director?  Questions like 'Can I get a salary?' or 'Should I take dividends?' are common. We've got the answers to simplify your decision.

This article discusses how company directors can receive payment. It covers options like salaries, fees, and dividends. It also points out important things to think about for each payment method.

Directors' salary: When and how it applies

A salary is typically what employees earn for their work. Company directors should only be paid if they have another job within the company. This job should be in addition to their responsibilities as a director.

When can a director receive a salary?

A director can earn a salary if they have another job in the company besides being a director. For instance, if a director also serves as the company's CEO or holds another operational role, they may be eligible for a salary like any other employee.

Superannuation obligations

When a director is paid a salary, the company must also pay the superannuation guarantee (SG) on their behalf. The super guarantee (SG) is set at 11% at the current rate. This superannuation is calculated based on the director's ordinary time earnings (OTE), which include regular wages or salary for their work hours.

Tax implications

Salaries paid to directors are subject to standard payroll tax. They are taxed as income in the director's personal tax return. The company must withhold PAYG (Pay As You Go) tax on the salary paid to the director.

Directors' fees: compensation for directorship services

Directors' fees are payments made specifically for a director’s services to the company, separate from any operational roles they might also have.

Eligibility for directors’ fees

A director may receive directors’ fees if:

The company does not employ them in any other capacity.

The company’s constitution allows for the payment of directors’ fees.

They meet certain procedural requirements, such as approval by the board of directors or shareholders.

What can be included in directors’ fees?

Directors’ fees can include compensation for:

• Attending board meetings
• Travelling expenses incurred while performing directorial duties
• Other expenses related to the role of a director

Superannuation and tax treatment

Directors’ fees are subject to superannuation, calculated on the OTE, just like a salary. They are also subject to payroll tax, and directors must include these fees as income on their personal tax returns.

Director’s payment through dividends: Sharing in the company’s profits

Dividends are payments made to shareholders from the company’s profits. Directors who are also shareholders may opt to receive dividends as a form of income.

When can a director receive dividends?

Directors who hold shares in the company are eligible to receive dividends. The decision to distribute dividends typically requires board approval and is based on the company’s profitability.

Tax implications of dividends

Dividends differ from salaries and fees because they are not subject to superannuation contributions. However, dividends are taxable income for the recipient, and the company must pay corporate tax on its profits before distributing dividends. Directors receiving dividends will also receive franking or imputation credits, which represent the tax already paid by the company.

Suppose a director’s personal tax rate is lower than the company’s tax rate. The Australian Tax Office (ATO) may refund the difference, providing a potential tax advantage. Conversely, if the director’s tax rate is higher, they may need to pay additional tax.

Choosing the right payment method: Key considerations

Whether to receive a salary, directors’ fees, or dividends depends on several factors, including the director’s role within the company, the company’s profitability, and the director’s overall tax situation. Here are some points to consider:

Employment status: If a director is actively working in an operational role within the company, a salary and associated superannuation benefits should be paid - Single Touch Payroll (STP) requires it.

Company profitability: Dividends are only an option if the company is profitable and has retained earnings to distribute. They also offer potential tax advantages due to franking credits.

Tax planning: Directors should work closely with their accountants or tax advisors to assess the most tax-efficient method of receiving payments, considering their personal tax rates, superannuation needs, and long-term financial goals.

Company constitution: Ensure the company’s constitution allows for the chosen payment method, especially when considering directors’ fees.

Seeking professional advice

Given the complexity of tax laws and the varying implications of each payment method, company directors should seek professional tax advice before deciding on their compensation structure. An accountant can help deal with the tax obligations and ensure compliance with relevant laws while optimising the director’s personal tax position.

Conclusion

Company directors have several options for receiving income, each with its rules and tax consequences. Whether through a salary, directors’ fees, or dividends, it’s crucial to understand the implications of each method and choose the one that aligns with the company’s and the director’s financial strategies. Always consult with a tax professional to ensure the chosen method is compliant and tax efficient.

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