Answer from Baker Tilly Staples Rodway Auckland Taxation Services manager Allison Ranby: Payments to Directors need to be handled carefully as they are usually (but not always) subject to withholding taxes and GST complexity. In general, a director meets the definition of an employee. Therefore, a tax obligation arises to withhold tax on payment of the director’s fee because the fee is classified as a schedular payment.
- The definition of an employee includes anyone who receives or is entitled to receive a PAYE income payment.
- A PAYE income payment includes a schedular payment.
- A schedular payment usually includes payment of a company director’s fee.
The standard rate of tax for directors’ fees is 0.33 for each dollar of the payment (33%). However, who the fee is paid to needs to be considered to determine whether tax needs to be withheld, and the tax rate that may apply.
Directorship services provided by an individual (natural person)
- Where an individual performs directorship services as an employee of a company, the director’s fee is taxed as salary or wages or an extra pay under the PAYE rules and is not a schedular payment.
- There is an exemption to the liability to withhold tax on directors’ fees paid to shareholder-employees, however the exemption applies only in certain circumstances.
- Where the individual is an independent contractor, the director’s fee is a schedular payment. Tax needs to be withheld at the rate of 33% unless that person has a special tax rate certificate or holds a certificate of exemption.
Directorship services provided by entities
- Where the services are provided by a company, no tax needs to be withheld from directors’ fees.
- Payments to a partnership for directorship services will generally be schedular payments.
- Payments for directorship services made to a public, local or Māori authority will not be schedular payments.
Directorship services provided by non-resident individuals
- The schedular payment rules only apply to directors’ fees if the fee has a New Zealand source (unless any exemptions apply).
- Where directors’ fees are foreign-sourced, there is no requirement to withhold tax.
- Inland Revenue considers that most directors’ fees paid to non-resident individuals are New Zealand-sourced and this is regardless of whether the services are performed in New Zealand or overseas. This means they will be required to have withholding tax deducted.
Directorship services provided by a non-resident entity
- Directors’ fees paid to a non-resident entity (rather than an individual) may be fully or partly sourced in New Zealand. The fees may also be foreign-sourced. Care needs to be taken to determine source before establishing whether a liability to withhold tax arises.
- Directors’ fees paid to a non-resident entity with a permanent establishment (PE) in New Zealand (where the fees are attributable to the PE) are New Zealand-sourced.
Directorship services provided by a non-resident entity or individual in New Zealand
- When directorship services are performed in New Zealand by a non-resident, the payment will not be a schedular payment if the total payments received in any 12-month period are less than $15,000. This is notable as it leads to a different outcome than when the directorship services are performed offshore (by the same individual or entity).
- Double Tax Agreements (DTAs) almost always allow New Zealand to tax Director fees paid in respect of New Zealand resident companies, regardless of the tax residency of the Director. However, care needs to be taken (particularly under the US DTA) to check whether relief is available when the directorship services are performed in New Zealand. The director’s fee will not be a schedular payment if full relief is available under a DTA and the non-resident is present in New Zealand less than 92 days in a 12-month period.
Returning tax on a schedular payment
- A director fee that is a schedular payment should be included in your EMS (employer monthly schedule), even when a special rate certificate is held for 0%.
- The amount of tax to withhold is calculated net of any GST charged and Reimbursed costs are not included in the fee amount.
For all directors’ fees
- If the fee is a schedular payment and the entity or individual providing directorship services does not provide their IRD number, the non-notification tax rate of 45% applies.
- If payment to the entity or individual for directors’ fees is not a schedular payment (and there is no requirement to withhold tax), there is scope to agree to treat the payment as a voluntary schedular payment and withhold tax.
Where an obligation to withhold tax arises, tax may not necessarily need to be withheld at 33%. It is possible for a director to hold a certificate of exemption or a special tax rate certificate.
GST and Directors' Fees
Understanding when a director is able to (or must) register for GST can be tricky. Inland Revenue has issued a ‘Questions we’ve been asked’ as well as three public rulings on this issue.
In summary the public rulings confirm Inland Revenue’s historic position which is:
- A professional director or board member does not have a taxable activity (so is unable to register for GST) if the only service they provide is director services – even where that service is provided to multiple firms. This is because the GST Act 1985 specifically excludes director services from the definition of a taxable activity.
- However, where a director is already GST registered (and is therefore already carrying on a taxable activity separate to directorships), and the director services are provided as part of that taxable activity, then GST applies to the provision of director services.
Given the above, the ‘Question we’ve been asked’ was whether, if directors and board members provide their services through a personal services company (PSC), would the PSC be able to register for GST.
The short answer is yes, the PSC can register for GST and GST input tax credits can be claimed by those purchasing the services. This is on the proviso the PSC already has a taxable activity (and is therefore able to register for GST), and the person providing the services is required to account to the PSC for the director services. Ideally, the PSC (rather than the director themselves) should contract to the company for the director services. Merely being required to account for the services to the PSC is a technical position.
Of note is that a natural person is not required to account for GST where they take up a directorship as an employee or partner of a partnership. In these instances it is the employer and the partnership that account for the GST (on the proviso they are already GST registered and the directorship is taken up as part of that organisations taxable activity).
Please let the director know that if they are GST registered but registration needs to be cancelled, there may be GST to return (an output tax liability) for any goods and services retained that were used in providing the director services. As the registration (or requirement to deregister) is fact specific, it does pay for the director to discuss this with their tax advisor.
If you require assistance in relation to this matter, our nationwide Baker Tilly Staples Rodway specialists are more than happy to assist you with queries or tax advice.