You might be wondering how sole company directors receive their pay. Company directors receive income in a number of different ways. However, it is all dependent on which avenue would be best suited to your company. Different tax and legal obligations are required for each method, so it is important to understand the different methods to receive pay as a sole company director.
Read our guide below to figure out which method suits you best.
Table of Contents
Company Constitution
Company directors not entitled to any payment unless there is a provision within the constitution or agreed upon by shareholders by resolution. Section 202A of the Corporations Act 2001 (Cth) governs the remuneration of directors, hence, it is important to be across this piece of legislation. Keep in mind, section 202A(1) is a replaceable rule and can be altered within your Constitution. If you need assistance with your company constitution and the remuneration of directors, speak to a company lawyer.
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Salary
Salaries are provided to directors who are also employed in another role within the company. In this scenario, directors take the position of employees and receive superannuation benefits. However, the company will withhold tax and process it through the Australian Taxation Office (ATO). For some, this might not be the most tax-friendly method to receive pay as a sole company director. However, you will always be aware of how much you’ll be receiving and taking from the company.
Directors Fees
This is one of the most common ways company directors receive their pay. Directors fees are compensation to the director for their services. However, to be eligible for directors fees, you cannot be an employee of your company and you must meet specific procedural requirements. These fees cover travel costs, attendance of meetings and expenses associated with directorship. On the other hand, your company’s shareholders can decide to approve such payments under the Corporations Act.
Directors fees are subject to superannuation at the normal rate of 9.5% based on ordinary time earnings of the director. Another important point to consider is the procedural requirements for directors fees. For example, company directors cannot receive pay if they are an acting trustee for a trust. This is only possible you pass a resolution at a general meeting.
Dividends
Dividends are a portion of your companies profits paid to shareholders in return for their investment. If you are a shareholder of your company, you are eligible to be paid dividends. However, there are important points to consider when deciding whether you would like to be paid in dividends.
Your company must pay tax on profits, then the Director will receive either a franking credit for the tax paid to the director for their share of the dividend. The ATO will refund the difference if your personal tax total (as a Director) is less than your company’s tax total.
However, something that you should keep in mind is the potential tax problems that dividends can create. If your company becomes insolvent, you may have to repay the dividends taken. If you need more information about tax obligations on your dividends, speak to a taxation lawyer.
Conclusion
Company directors receive payment in a number of different ways. However, the most common is through directors fees or dividends. If you have any other questions or require assistance, speak to a company lawyer.
