Taxation of directors’ fees – are you getting it right?

Breaking news

On 20 September 2018, the Tax Working Group released its Interim Report on the Future of Tax.  The media has largely focused on the capital gains aspects of the report, but companies and directors should be aware that the report also contains a number of comments and recommendations on other aspects of the tax system.

In particular, the Group recommends that the Government consider new rules under which directors could be personally liable for outstanding PAYE and GST debts owed by the company if the company fails to pay the debts.  The Group is due to release its Final Report in February 2019.

If you would like to know more about the Interim Report or would like to provide feedback to the Group, we would be happy to assist you.

As a director, you need to be aware of how New Zealand withholding taxes apply to fees that you (or your company) receive for directorship services, and, if necessary, make changes to ensure that the correct tax treatment is being applied. You should also consider your GST position, including whether you need to register for GST, account for GST on the fees, and issue tax invoices as part of a business of providing directorship services.  It is important that you get this right – if you get it wrong, onerous penalties and interest charges could apply.

Inland Revenue has been revising its guidance on these issues over the last few years and recently released a draft statement on the withholding of tax on fees paid to non-resident directors. IS 18/XX – Income tax – How schedular payment rules apply to non-resident directors’ fees is the most recent in a series addressing the tax treatment of directors’ fees.

Inland Revenue previously released IS 17/06 – Income tax – Application of schedular payment rules to directors’ fees, as well as BR Pub 15/10 – Goods and services tax – Directors’ fees.

Together, the trio of statements provides comprehensive guidance about the interaction between the payment of directors’ fees and New Zealand’s income tax and GST rules.

The table below briefly summarises the position:

Tax typeResident directors’ feesNon-resident directors’ fees
Income taxNew Zealand withholding tax is deducted from the payment under the PAYE or other withholding tax rules, unless paid by the company to another entity (subject to certain exceptions).New Zealand tax is withheld from the payment if fees are New Zealand-sourced income (subject to certain exceptions).
GSTGST chargeable where directorship services are provided by a registered person (individual or entity) in the course of a taxable activity with an annual turnover of $60,000 or more carried on by that person (exclusions apply for services provided by partners in partnerships).GST should generally not be payable on directors’ fees paid to a non-resident director if the physical performance of the services occurs wholly outside New Zealand.  GST may become payable if the services are partially or wholly performed in New Zealand.

Our tax team has summarised Inland Revenue’s guidance on the tax treatment of directors’ fees in an article linked below, including:

  • the income tax treatment of fees paid to resident directors;
  • the withholding tax treatment applicable to non-resident directors’ fees; and
  • the GST treatment of directors’ fees.

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