Understanding How Directors Get Paid — and the Tax Consequences

Understanding How Directors Get Paid — and the Tax Consequences

Running a private company in Australia often involves directors who also work in or own the business. But not all payments made to directors are treated the same way for tax, superannuation, and PAYG purposes.

Let’s break down the main types of payments a director can receive — and what each means.

1️⃣ Director Fees

What it is:

A director’s fee is paid for performing director duties — attending meetings, managing company strategy, and ensuring compliance with the Corporations Act.

Tax treatment:

Treated as ordinary income for the director.

The company must withhold PAYG tax and report it through Single Touch Payroll (STP).

Superannuation Guarantee (SG) generally applies.

The company can claim a tax deduction for the expense.

Example:

If a director receives $5,000 per month as a director fee, PAYG tax must be withheld, super is payable (currently 11.5%), and the net amount is paid to the director.

2️⃣ Director Salary

What it is:

When a director also works in an operational role (e.g., managing director, accountant, or marketing head), they may receive a salary similar to any other employee.

Tax treatment:

Treated as salary/wages for both tax and super purposes.

The company must pay PAYG withholding, super guarantee, and report via STP.

The director is considered an employee for these payments.

The company claims a deduction for wages and super.

Example:

A director who works full-time may receive a salary of $100,000 with PAYG and super applied as usual.

3️⃣ Dividends Paid to Directors (Shareholders)

What it is:

Dividends are returns on share ownership, not for work performed. A director may receive dividends because they own shares in the company.

Tax treatment:

No PAYG or super applies — it’s an investment return, not salary.

Dividends may be franked or unfranked.

Franked dividends include a credit for company tax already paid (currently 30% for most companies).

Must be declared in the director’s personal tax return.

The company cannot claim a deduction for dividends.

Example:

If a director-shareholder receives a $20,000 franked dividend, they get a 30% tax credit for company tax already paid on that profit.

4️⃣ Other Remuneration Paid to Directors

What it is:

This can include bonuses, allowances, consultancy fees, or fringe benefits (like a company car or phone).

Tax treatment:

If paid in connection with employment or services, PAYG and super generally apply.

Fringe benefits (non-cash items) are subject to Fringe Benefits Tax (FBT).

The company can usually claim a deduction for these expenses (except certain entertainment).

5️⃣ Family Trust Distributions to Directors

What it is:

Sometimes, instead of the company paying directly, a family trust receives income and distributes part of it to directors or their family members.

Tax treatment:

The distribution is trust income, not salary.

No PAYG or super applies unless the director actually performs work for the trust.

The distribution is taxable to the individual receiving it, at their marginal tax rate.

The trust must prepare trust distribution minutes before 30 June.

⚖️ Summary — Tax, Super & PAYG

Type of Payment PAYG Withholding Super Applies Company Deduction Declared in Personal Return Notes

Director Fee ✅ Yes ✅ Yes ✅ Yes ✅ Yes Treated as employment income

Director Salary ✅ Yes ✅ Yes ✅ Yes ✅ Yes Treated like any employee salary

Dividend ❌ No ❌ No ❌ No ✅ Yes May include franking credits

Other Remuneration (bonus, car, etc.) ✅ Usually ✅ Usually ✅ Usually ✅ Yes FBT may apply

Family Trust Distribution ❌ No ❌ No ✅ For trust ✅ Yes Must have trust resolution

🚨 Key Consequences

PAYG & STP: All director fees and salaries must be processed through payroll.

Super: Directors are entitled to super on both salary and director fees.

Dividends: Do not attract PAYG or super but must be properly declared.

FBT: If directors get personal benefits (cars, phones), FBT rules apply.

Record-keeping: Keep board minutes and payment resolutions to justify the nature of each payment.