As business gets ready to recover under the new traffic light system launched by Government, many business owners are thinking of fresh ideas for efficiency, diversification and/or expansion.

This can come from many sources, but appointing a new director is an option that can be considered. Whether that be an executive or non-executive director, this is a substantial investment for a business looking for new input.

Directors’ fees: what you need to know

Although paying Directors’ fees represents a common practice for many businesses in New Zealand, from a tax and compliance perspective consideration must be given when it comes to the mechanics around these payments, such as withholding tax, GST and other obligations.

Directorship Services Agreement

It is best practice to obtain legal advice when entering into a Directorship Services Agreement. It should outline the nature of the services provided, liability and payment terms. It need not be overly complex but is required from an accounting and legal perspective.

Individuals Providing Services

Individuals providing directorship services commonly do so as independent contractors. In most cases, when a business pays director's fees to an individual who is providing services as a contractor, these fees will represent schedular payments from which withholding tax must be deducted. This withholding tax must be paid directly to Inland Revenue.

It is possible, albeit less common, that an individual will provide directorship services as an employee. An individual will provide directorship services as an employee if director duties are encompassed in the terms of their employment under an employment agreement. These duties may be in addition to other non-directorship duties. For example, she is employed as a managing director and may have both management and directorship duties.

If a business employs someone as a director, amounts paid to them for performing their directorship duties will be either “salary or wages” (regular payments), or an “extra pay” (a lump sum payment), not schedular payments. PAYE will need to be deducted from these payments, as the business would for any other payments of “salary or wages” or “extra pay” made to an employee.

GST registration does not affect the requirement to withhold

Some taxpayers believe they are not required to withhold any tax from directors’ fees they pay to a GST-registered director. This is not the case. GST registration is irrelevant when determining if a business is required to withhold tax from directors’ fees.

Remember, that if a person receives more than $60,000 per annum, they will have to register for GST. A tax invoice will be needed to be issued that reflects the GST impost.

Withholding Tax

If the directors’ fees paid are schedular payments, and the business is required to withhold tax at the time of payment, the payer must pay the tax withheld to Inland Revenue. The business also needs to record details of the person or entity that is paid, the fee amount, and the tax withheld in the business’ employer monthly schedule.

Depending on who the business is paying, and the information provided, the withholding rate to be used may vary. It is therefore important to determine the appropriate rate for each person or entity the business is paying.

Standard Rate

If the person the business is about to pay provides an IR330C recording their name and tax number with no elected rate, the business should withhold tax at a rate of 33%. This is the prescribed withholding rate for directors’ fees.

Exemption certificates

If the director holds an exemption certificate, the business will not need to withhold tax from that payment.

Paying Directorship fees to a company

As a general rule, if the business is paying directors’ fees for directorship services provided by a company, these payments will not be schedular payments and there is no requirement to withhold tax from them.

Companies are the most common non-individual provider of directorship services. In many cases, these companies are “personal services companies” owned and operated by a professional director. The professional director is employed by their personal services company and the business contracts out with the company to provide the directorship services, not the director personally.

As mentioned above, care should be had when drafting a directorship services agreement using an interposed company, as some delegation of duties provisions can trigger the obligation to withhold tax.

Experience suggests that individuals using a company to receive directorship fees should apply for a withholding exemption certificate.

Be mindful that these invoices raised by the company will attract GST like those services rendered by individuals.

If you need assistance applying for an exemption certificate, working out whether fees need GST added or not, or simply need to be sure you are withholding correctly, the team at Bellingham Wallace are here to help you.