Are Directors Bonuses still a viable Tax Planning option?
By Steve Marsten
For many years it was standard practice and not an uncommon strategy for companies to resolve to pay directors fees or director/employee bonuses in the current financial year, but not physically pay them until the following financial year. The purpose of this is a form of tax deferral, whereby a company definitely commits itself to paying directors fees or bonuses in the current financial year and accordingly claims a tax deduction and then it does not actually pay the amounts in that year, but in a following year. A deduction is claimed in the current year, but the company incurs no cash outflow or payment.
This works for the recipient director/employee’s part as well, as the law is very clear and straight forward. The bonus, fee, or salary or wages and other similar types of income is derived for income tax purposes at the time the income is paid or otherwise made available to the director/employee. This is the case notwithstanding that the services giving rise to the income may have been rendered in a previous year of income. So - although the director/employee is definitely entitled to the payment (because the company has made a resolution to pay it), they only need to declare the income in the year it is actually received.
So - you may be asking what is the Commissioner of the ATO’s position on this? Hence in order to claim a deduction in the current 2021/22 financial year, there must be a definite liability to pay the amount in question, and this liability must arise on or before 30 June. This can be achieved by the company passing a properly authorised resolution -signed and appropriately dated before the 1st July, 2022. Those amounts must actually be paid in the following months and at least by the end of the following income year. When those amounts are paid, for a deduction to be claimed, the standard PAYG Withholding rules must be complied with.
For more information on this matter feel free to call the team at UHY Haines Norton Gladstone on 07 4972 1300.