In this is Part 2 in a series of articles by our State Tax Team we examine how and when payroll tax is payable on directors’ fees. Payroll tax is a state-based tax imposed on a business where taxable wages exceed relevant state or territory thresholds. Despite a harmonisation process across Australia the provisions remain a complicated area of state taxes. Legislative references in this article are the Victorian Payroll Tax Act 2007.
Is there an alternative way of paying directors without triggering payroll tax?
As seen above, any payments made to a director, in their role as director, will trigger payroll tax. If, however, a director is also an equity holder, then, in the alternative, the director could receive distributions of profit. As discussed in Part 3 of our series of articles on payroll tax, distributions of profit are generally not subject to payroll tax.
When advising on payroll tax matters we often find that questions arise, and the revenue office’s attention is captured, in relation to payments to employees that are also owners and/or directors of the business. The question being: are payments made to directors and equity holders subject to payroll tax? The answer is: yes and no.
As a starting point is it important to return to the base concept of where a payroll tax liability arises. In the 1944 High Court case of Mutual Acceptance Co Ltd v Federal Commissioner of Taxation [1944] HCA 34 , which has been referenced in payroll tax cases since, Chief Justice Latham explained this as:
The payments (in cash or kind) which are included in "wages" are payments made "to any employee as such." They therefore comprehend only payments made to an employee in connection with and by reason of his service as an employee or in respect of some incident of his service.
Payroll tax is therefore levied on taxable wages which are wages (a summary of which we provided in Part 1 of this series) paid for or in relation to services performed by an employee. In determining whether a payment to a director or business owner is subject to payroll tax consideration should be given to this connection.
Are directors’ fees subject to payroll tax?
At common law, directors are not employees and therefore, ordinarily, directors’ fees would not be subject to payroll tax. However, the payroll tax legislation provides that taxable wages includes amounts payable by a company by way of remuneration to or in relation to a director of a company. As such director fees (and other payments to directors) are subject to payroll tax. This is so, irrespective of whether they are paid to a working or non-working director, and irrespective of where they are paid to.
The inclusion of director fees in payroll tax disclosures is an area the SRO is paying particular attention to. As reported here the SRO has invested compliance resources into auditing businesses to ensure directors’ fees are included in payroll tax reports. Businesses should therefore carefully assess these payments to ensure the correct treatment is applied.
In practice common questions which arise in relation to director fees are as follows:
Are fees paid to non-working Directors subject to payroll tax?
Director fees are subject to payroll tax and this is the position irrespective of whether or not the director is a working or non-working director.
If director fees are paid to third parties, such as a trust, are they subject to payroll tax?
The liability for payroll tax on director fees arises irrespective of where the fees are paid to.
Section 46(2) deals specifically with director fees paid to third parties. The provision states that payments made to a third party which, if paid directly to the director, would have been treated as wages, will be subject to payroll tax.
By way of example Sparky Pty Ltd (Sparky), a company based in Hawthorn, Melbourne is owned equally by Tom and Zoe. There are four directors of Sparky – Tom, Zoe, Chris and Alex. Tom has requested that the business pay his director fees to his trust, TH Family Trust, rather than directly to the him. This situation is the type which section 46(2)(b) is intended to capture.
The fee is paid by Sparky in respect of Tom’s employment as a director of the company. The fee is paid to the TH Family Trust not due to any relationship between the trust and Sparky but as a direct result of Tom’s role as a director. The payments will therefore be subject to payroll tax even though they are paid to a third party who is not an employee of the Sparky.
Is there an alternative way of paying directors without triggering payroll tax?
As seen above, any payments made to a director, in their role as director, will trigger payroll tax. If, however, a director is also an equity holder, then, in the alternative, the director could receive distributions of profit. As discussed in Part 3 of our series of articles on payroll tax, distributions of profit are generally not subject to payroll tax.
Are allowances and reimbursements paid to directors subject to payroll tax?
Allowances are generally assessable to payroll tax in all Australian jurisdictions.
In Victoria allowances for motor vehicle, accommodation and living-away-from-home may be fully or partially exempt in some circumstances. Further, a distinction is required to be made between an allowance and a reimbursement. Reimbursements are generally exempt from payroll tax where they are incurred in the ordinary course of business and the exact amount of the expense is reimbursed to the employee.
Referring again to the example of Sparky, the company calls a meeting of its directors. Three of the directors, Tom, Chris and Zoe all reside in Melbourne. The firm advises that they will be reimbursed for costs subject to providing receipts. Alex has further to travel to work and to assist her in covering the costs her extended travel the firm advises that she will be provided with a fixed amount of $500.
The amounts paid to Tom, Chris and Zoe will be precisely the amounts incurred in the course of them fulfilling their director roles. These payments fall within ‘reimbursements’ and will not be subject to payroll tax. However, as Alex is provided with a fixed amount that is not commensurate with her actual expenses, this amount would be deemed to be an allowance and subject to payroll tax. There may also be fringe benefits tax consequences at a federal level.
If the firm instead requested that Alex repay any excess amount above her actual costs, this would fall back within a reimbursement and not be subject to payroll tax.
Questions?
If you have any questions about how payroll tax should apply in your circumstance, please contact our specialist team at:
Laura Spencer
Senior Associate
T +61 3 9611 0110
lspencer@sladen.com.au
Denise Tan
Senior Associate
T +61 3 9611 0160 | M +61 438 714 965
E: dtan@sladen.com.au
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E: pbroderick@sladen.com.au
