Edited version of private advice

Authorisation Number: 1051709713341

Date of advice: 28 July 2020

Ruling

Subject: Deferral of director's payments

Question

Can a company claim a deduction for an amount for directors' fees which it is obligated to pay but has not yet paid?

Answer

Yes

This ruling applies for the following period

01 July 2019 to 30 June 2020

The scheme commences on:

01 July 2019

Relevant facts and circumstances

You advised that the XXXX Pty Ltd is a company that provides its clients legal and accounting services.

You are the director of the company.

The company was established in XXXX and has XXXX employees including you as the director.

You are a fulltime working director in the company and receive your director's fees from the company. The company pays you with the other employees and withholds all the necessary tax and superannuation for you at the time of your payment.

Due to COVID19, the company has cash flow problems and has differed your director's payments until next year in XXXX.

The company had a meeting on XXXX 2020 to consider the remuneration of the directors for 2020.

Relevant legislative provisions

Income Tax Assessment Act 97, s 8-1

Income Tax Assessment Act 97, s 6-5

Reasons for Decision

These reasons for decision accompany the notice of private ruling for XXXX.

Summary

Deferral of director's payments

Detailed reasoning

Accruing directors' fees is when the company receives a tax deduction in one financial year, but the related party (directors), are not taxed on the income till the following financial year.

A company is entitled to claim a deduction in one financial year, for directors' fees if it is definitely committed to paying those directors fees at the end of a financial year. As per IT 2534, this commitment will be evidenced by a properly written authorised shareholders resolution that has been passed prior to 30th June of the year it is due. Under the Corporations Act 2001 only the shareholders of a company can authorise the payment of directors' fees.

The directors receiving the director's fees are not taxed on them until they are actually received, which will be the following financial year. Directors' fees are normally paid by making a payment from the company bank account as per normal employee wages or crediting the directors' loan account. Both payments are subject to the normal employee PAYG with-holdings and superannuation guarantee requirements.

Taxpayer Alert, TA 2011/4 deals with unpaid directors' fees. The directors' fees accrued in one financial year will only be deductible in that financial year, if they are paid out and assessed to the directors in the following financial year. That is, directors' fees are not deductible if indefinitely accrued and never paid.

The IT 2534 and TA 2011/4 provide guidance that a 'timing advantage' canarise from the proper accrual of directors' fees at year-end, provided (among other things) that the advantage obtained was limited to one income year.

Furthermore, the company may be subject to Tax ID 2014/34. This ID is concerned with the operation of s82KK of the ITAA 1936, a specific anti-avoidance provisiontargeted at schemes designed to postpone a tax liability. Whilst the ID does not specifically target directors' fees, it does create some potential concerns over whether the ATO may, at some stage, rely on s82KK to challenge the practice of accruing directors' fees.

Application to your circumstances

You are able to defer the director's payments as per your shareholders resolution reached at the meeting on XXXX 2020. This deferral can only be made if you have adhered to the requirements to IT 2534 and TA 2011/4 as stated above in our detailed reasoning.