Tax Commissioner Michael D'Ascenzo this week warned directors of private companies about claiming deductions for directors fees where amounts may remain unpaid by the end of the following income year. The warning also serves as a timely reminder for any company director loan account issues that are outstanding prior to 30 June.
Unpaid directors' fees clampdown
Earlier this year the ATO released a Taxpayer Alert 2011/4 with respect to the deductibility of unpaid directors' fees. Whilst not a ruling in itself, Taxpayer Alerts are intended as an 'early warning' to taxpayers and their advisers of significant tax planning issues or arrangements that the ATO has under risk assessment or about which it has concerns. The ATO view regarding taxation treatment of directors fees, bonuses is contained in Taxation Ruling IT 2534
To qualify for a deduction a company must, before the end of the year of income, become definitively committed to the payment of a quantified amount of directors fees, bonuses or other such payments.
The ATO have identified an arrangement where companies resolve to definitively commit to pay an amount for directors fees but qualify the resolution so that payment is not made until an unspecified time having regard to future cash flow.
If you are thinking of using such an arrangement to claim amounts that you are never intending to be fully paid out then be very, very careful. Whilst you think that you are smart by having a mismatch of deductions and income because fees aren't returned as income until received, the ATO will have a different view.
It is important to note that the ATO are not concerned with normal business practice where a company passes a resolution that creates an unconditional commitment to pay directors fees and the payment occurs within a reasonable time period which could extend outside the immediate year of income. They are only concerned where there are artifical arrangements created.
Rest assured the ATO will closely look at these arrangements and any others that attempt to take advantage of the income tax provisions contrary to the intention of the law. If you are unsure about your own circumstances should seek independent advice or apply for a private ruling from the ATO.
Fix up those outstanding company director loan accounts!
If you are a company director who has been taking money out of your company during the year but haven't repaid it then you either need to repay the amount in full prior to 30 June or you will need to declare it as income and have the appropriate amount of PAYG tax paid in the June quarter BAS. The ATO frown on any amounts outstanding unless there is a formal loan agreement in place with a set repayment schedule. Interest needs to be charged at the appropriate rates on any loan arrangement.