Non-executive Director fee arrangements: taxation implications of using the NED’s trust or services company

It is not uncommon for non-executive directors (NED) to engage with a company board through their own family trust or private company (the ‘NED Entity’). That is, the NED entity contracts with the company to provide the services of the NED to board.

Another example of this contract arrangement is when law firms provide a partner to the company board to act as NED. In those cases, the NED fees are typically directed to the law firm rather than the individual partner. These cases are not the subject of this article.

Rather, the purpose of the article is to alert directors to the potential for the Commissioner of Taxation to challenge the fee arrangements in particular circumstances.

The issues for NED consideration are:

  • A NED’s fees are personal services income (PSI) for tax purposes. This is because the individual NED holds an office that is personal to the individual.
  • The NED may have their own NED Entity (i.e., trust or company) to contract with the company to provide the services of the NED to the company
  • The NED Entity can pass the Personal Services Business (PSB) test of the income tax legislation because, for example, it has, say five company clients.
  • As the income is still PSI, the director needs to be careful as to how it is treated in the NED Entity.
  • If the NED Entity splits the fee income to other associates of the NED, or defers income tax by holding it within the entity and not paying the appropriate market value fee to the NED, the Commissioner of Taxation may look to challenge the structure under the anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936. This is something that is often not considered by the NED’s personal adviser who look to the 80% test of the PSI/PSB rules.
  • The Commissioner of Taxation released a draft Taxation Ruling in March 2021 that is yet to be finalised but nevertheless correctly reflects established case law. In paragraphs 148 to 150 and Example 40 of TR2021/D2, The Commissioner explains when Part IVA may be applied. The complete draft ruling can be found HERE.

This extended consideration of the general anti avoidance provisions is not always fully understood by NEDs and other contractors providing personal services.

© Guerdon Associates 2024
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