When are company directors fees NOT deductible?

 

Reproduced with permission from Allens International

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A company is entitled to a deduction for directors fees once the company has definitively committed itself to the payment, for example by passing a properly authorized resolution (Income tax ruling 2534) or incurring a quantifiable legal liability to pay a bonus (Merrill Lynch International).

If a company passes a resolution creating an unconditional commitment to pay the fees and the payment incurs within a reasonable time period in the following year of income, the amount is deductible. The Australian Taxation Office has warned companies about claiming deductions where amounts remain unpaid by the end of the following income year.

It has been practice widespread in Australia, for companies to definitively commit to a director’s bonus in one year and thus claim a deduction in that year but not pay it to the director until the following financial year, thus achieving some degree of the deferral.

  • The commissioner of taxation has issued a ruling that payments made in the current financial year and going forward, to employees, directors and contractors in relation to these bonuses, will not be deductible to the company if the payer fails to comply with the applicable PAYG withholding obligations.

That is to say, taxation must be deducted from the director’s fees payment in the current financial year for the deduction to stand. Further, at this point in time, the commissioner is not prepared to provide variations to the withholding amount in respect of the current financial year.

What this means is for companies that definitively committed to a directors bonus in the 2019 financial year, the payment of the bonus must occur in this financial year but for the same to be deductible and stand, income tax must be deducted from the bonus payment.

It is important that these matters be resolved before 30th June 2020.

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Written by Allens International  www.allensint.com.au
Chartered Accountants
Liability limited by a scheme approved under Professional Standards Legislation

Reproduced with permission