Businesses often engage directors and independent contractors to support growth, governance, and specialised projects. However, the tax treatment for these two types of payments is very different—and misunderstanding the rules can expose your business to unnecessary compliance risks.
At Certum Advisory, we help business owners navigate these obligations with clarity and confidence. Here’s a guide to understanding the tax rules that apply to directors’ fees and contractor payments.
Director’s Fees: How They’re Taxed
Director’s fees are treated differently from regular employee wages, but they still carry strict tax requirements.
1. Director’s Fees Are Taxable Income
All director’s fees must be declared in the director’s personal income tax return. These payments count as ordinary assessable income.
2. PAYG Withholding Is Mandatory
Even if a director is not an employee, the company must:
- Withhold tax under the PAYG withholding rules, and
- Report payments through Single Touch Payroll (STP).
3. Superannuation Is Not Always Required
Superannuation is not compulsory unless the director has an employment contract or receives remuneration that falls under employee-like arrangements.
However, many companies opt to make voluntary contributions for governance consistency.
4. Clear Documentation Is Essential
Minutes, resolutions, and fee agreements should reflect all director payments for audit and compliance purposes.
Contractor Payments: Different Rules, Different Risks
Independent contractors operate their own businesses, but that doesn’t mean your compliance obligations disappear.
1. Contractors Manage Their Own Tax—Usually
Contractors invoice your business and are generally responsible for their own:
- Income tax
- GST
- Deductions
However…
2. No ABN? You Must Withhold at the Top Marginal Rate
If a contractor fails to provide their ABN, your business must withhold tax at 47% (no-ABN withholding rule).
3. GST May Apply
If the contractor is GST-registered:
- They will charge 10% GST on invoices.
- Your business can claim the GST as an input tax credit.
4. Superannuation Obligations Can Still Apply
This is often misunderstood.
Even when someone is hired as a contractor, your business may still need to pay super if the contractor:
- Is paid mainly for their labour,
- Works under your direction, or
- Is personally required to perform the work.
This is known as the “deemed employee” rule for superannuation.
Key Differences at a Glance
| Aspect | Director’s Fees | Contractor Payments |
| PAYG Withholding | Required | Not required (unless no ABN) |
| GST | No GST applies | GST applies if the contractor is registered |
| Super | Not compulsory | Required for labour-based contractors |
| Reporting | STP | Accounts payable, BAS statements |
Common Compliance Risks
Businesses may face ATO penalties if they:
- Misclassify contractors
- Fail to withhold PAYG from director’s fees
- Do not pay super for eligible contractors
- Miss STP reporting requirements
At Certum Advisory, we frequently help clients realign their payroll and contracting practices to reduce risk and improve transparency.
Need Help Navigating These Rules?
Tax and payroll obligations can be complex, especially when dealing with mixed arrangements like directors, consultants, and contractors.
Certum Advisory provides practical, compliant, and tailored solutions to ensure your business meets its obligations without unnecessary stress.
Speak to our team today for guidance on director remuneration, contractor agreements, or full payroll compliance reviews.
