Deductibility of unpaid directors fees

29 July 2011

The ATO has released an alert describing situations where a company claims a deduction for directors fees which are not paid in full in the current or subsequent years.

The ATO is questioning whether the directors’ fees are in fact incurred and hence deductible under s8-1 in that year’s income tax return, particularly where it seems that there is no intention to make these payments in the foreseeable future.

Normally, a company can claim a deduction under s8-1 for directors’ fees that have been accrued at 30 June, as long as the company is absolutely committed to the payment of director fees and a proper resolution is passed before 30 June. However, the director receiving the payment is not required to return this income until they are actually received. The ATO is concerned that this strategy is being used to trigger deductions in the company, even when there is no genuine intention to pay the fees in the foreseeable future.

The alert notes that the Commissioner will consider applying the general anti-avoidance rules in Part IVA of the ITAA 1936 to disallow these deductions.

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