There has been some confusion concerning the correct GST treatment of directors’ fees in the past. This confusion has not been confined to taxpayers. The IRD has struggled with the issue as well, and has changed its published position a number of times.
Fortunately, the IRD’s latest position on the issue (first published in September 2000) seems to be correct. Also, as it has been published in a binding public ruling, directors who rely on it will be protected in the event the IRD changes its position again (although we consider it is unlikely to do so). Given the previous uncertainty however, directors may wish to confirm that they are returning GST in accordance with the IRD’s latest position, rather than an earlier, incorrect IRD position.
Arrangements for providing director services
The correct GST treatment of directors’ fees depends on the legal arrangement under which the director’s services are provided. Director services can be provided to the recipient company either:
- by the director personally
- by a company, which then employs or subcontracts with the individual who will be engaged as the director, or
- by a partner in a partnership.
We set out the correct GST treatment of each below.
Provision of director services by an individual
The Goods and Services Tax Act 1985 excludes the supply of director services from GST by an individual in certain circumstances. In particular, where a natural person supplies the director services personally (rather than through a company or a partnership), the director’s fees will not be subject to GST unless both:
- the directorship was accepted in the course of another taxable activity carried on by the person, and
- the person is registered for GST.
For example, if the director was a GST-registered chartered accountant and accepted the directorship in connection with his or her accountancy practice, then the director’s fees would be subject to GST.
Also, if the person carried on another taxable activity, but his or her engagement as a director was unrelated to that taxable activity, then the director’s fees would not be subject to GST. For example, if the person carried on a taxable activity of farming, and accepted a directorship of the New Zealand Symphony Orchestra, then GST would still not be payable on any director’s fees.
We note that the provision of director services is not itself a taxable activity for GST purposes. This means that a professional director who personally provides director services should not be subject to GST on any fees received, no matter how many directorships the person accepts.
Provision of director services by a company
A fairly common arrangement is for a director to provide his or her services though a company. This involves:
- the supplying company contracting to provide the director’s services to the recipient company. The recipient company pays the supplying company for this service; and
- the supplying company separately subcontracting (or employing) the individual to act as a director of the recipient company. The supplying company pays the individual director for this service.
This arrangement therefore involves two supplies in respect of the same director services, namely a supply by the supplying company to the recipient company, and a separate supply by the individual to the supplying company. GST is potentially payable on either or both of these supplies.
In respect of the supply by the supplying company to the recipient company, this will be subject to GST where the supplying company is registered for GST. This is because the exemption from GST for certain director services provided by an individual does not apply when those services are supplied by a company (or other third party).
In respect of the supply by the individual to the supplying company, the GST treatment will be the same as described above under the heading “Provision of director services by an individual”.
For example, where a professional director sets up a special purpose company through which to provide his or her services, then:
- GST will be payable by the special purpose company on fees received for its provision of director services to the recipient company, if the special purpose company is registered for GST or required to be registered. The special purpose company will be required to register for GST if its estimated or actual revenue from such services exceeds $40,000 in any 12-month period; and
- GST will not be payable by the professional director on any remuneration received from the special purpose company.
Provision by a partner in a partnership
Where a partner supplies director services in the course of the partnership’s business, those director services will be deemed to be supplied by the partnership for GST purposes and not the partner. The exclusion from GST for certain director services supplied by an individual also does not apply where the director services are supplied by a partnership.
The result of this is that, where a partner supplies director services in the course of a GST registered partnership’s business:
- GST is payable by the partnership on any fees received for its provision of director services to the recipient company, and
- GST is not be payable by the partner on any remuneration received from the partnership. Instead, any such remuneration is treated as part of the partner’s share of profit from the partnership.
If a partner supplies director services, but not in the course of the partnership’s business (and not otherwise connected with the partnership), then the director services will be treated as if they were provided by the partner personally for GST purposes. Accordingly, the GST treatment will be the same as discussed above under the heading “Provision of director services by an individual”.
Where directors’ fees are subject to GST, the supplier will need to charge the recipient company an additional amount on account of GST to ensure that it is in the same net position as if no GST had been payable.
Most recipient companies will be entitled to claim an input tax credit equal to this GST. Accordingly, any GST charged will not be a net cost in such a case. Consequently, there is no GST disadvantage to providing director services through an arrangement under which GST is imposed (e.g. through a company) where the recipient company is entitled to claim full input tax credits.
Certain companies will not be able to claim a full input tax credit for any GST charged however. These are companies which make GST exempt supplies, and primarily consist of companies in the finance and investment industries. Accordingly, there would be a GST advantage in such a case for directors who do not provide their services in connection with another taxable activity to provide their services directly to the recipient company. This is because GST would not be charged where such a director provides his or her services directly to the recipient company, but GST would be charged (and could not be fully recovered) if the director provided his or her services through a company (assuming the company was required to be registered for GST). Naturally however, there will be many other considerations involved in such cases other than simply GST.