Show me the money - Legal considerations arising in the remuneration of not-for-profit directors

An organisation cannot pay its directors if its constitution prohibits such payment. While it is standard practice for a not-for-profit constitution to permit directors to be reimbursed for travel and other relevant out-of-pocket expenses, many constitutions expressly prohibit directors being remunerated for their services as a director. Therefore, a special resolution of members varying the constitution may be required before remuneration is permissible.

Registered charities must comply with certain ongoing requirements, including having a charitable purpose for the public benefit. Registered charities are also entitled to various Commonwealth charity tax concessions, including income tax exemption, fringe benefits tax (FBT) rebate or exemption, goods and services tax (GST) concession and deductible gift recipient (DGR) endorsement. 

To maintain eligibility for such registrations and endorsements, an organisation cannot (amongst other things) be carried on for a purpose of profit or gain. Provided the remuneration of directors does not change the focus of the organisation to having a purpose of ‘private’ gain (i.e., the giving of financial gain / benefit to its directors), then remunerating directors should not result in the loss of ACNC registration or available Commonwealth charity tax concessions.

Before remunerating directors, an organisation should undertake market research to get a sense of reasonable remuneration rates in the not-for-profit sector and ensure directors are remunerated at a comparable amount to directors of other similar organisations.

The ACNC has a guide on Remunerating responsible people and a factsheet on Key management personnel remuneration (which includes remuneration of directors).

A charity may need to disclose director payments as part of its ACNC Annual Information Statement (AIS) reporting. When preparing its financial statements, the charity may also need to disclose key management personnel (such as directors) remuneration in accordance with the Australian Accounting Standards Board Related Party Disclosures Standard (AASB 124).

Certain companies, known as special purpose companies, are eligible to remove the word ‘limited’ from their name if they meet certain criteria under section 150 of the Corporations Act 2001 (Cth) (Corporations Act). One such criterion is for the company’s constitution to include explicit wording prohibiting the payment of fees to directors. Therefore, if a company’s constitution does, or is amended to, allow payments to directors in their capacity as directors (even if remuneration is not actually paid), it must use ‘Limited’ in its name.

Under various State and Territory laws, volunteers are exempt (subject to some exceptions) from personal civil liability for their actions (e.g., for negligence) while carrying out their volunteer community work. This extends to individuals acting as directors of certain companies on a volunteer basis. Such exemption is not available to paid directors even if they are a director of a not-for-profit organisation. We note receiving reimbursement for out-of-pocket expenses incurred in connection with the performance of duties for the organisation does not generally result in a person ceasing to be treated as a volunteer for this purpose.

Under harmonised workplace health and safety legislation in New South Wales, Queensland, Australian Capital Territory, South Australia, Tasmania, Western Australia and Northern Territory both paid and volunteer directors have a duty to exercise due diligence to ensure the organisation complies with its workplace health and safety obligations in those jurisdictions. However, a volunteer director cannot be convicted of an offence for failure to comply with those obligations. Victoria has not adopted the harmonised legislation but also provides an exemption from similar obligations for volunteers, including volunteer directors. In each jurisdiction a paid director may be found personally liable if an organisation contravenes the relevant laws and the contravention arises because the director failed to take reasonable care.

Under Commonwealth legislation, namely the Superannuation Guarantee (Administration) Act 1992 (Cth), paid directors will fall within the definition of ‘employee’. An organisation will therefore be required to meet its superannuation obligations with respect to remunerated directors.

Payroll tax is a tax payable on wages and deemed wages paid by an employer. In certain circumstances, payroll tax may be payable on director remuneration. This will depend on, amongst other things, the principal place of residence of the director and whether the organisation has pay roll tax exemptions in place.

Fees paid to directors as their remuneration will generally not be subject to FBT. Broadly, remuneration and allowances are not classified as “fringe benefits” for FBT purposes and instead are treated as ordinary income and forms part of the payee’s assessable income. However, if any fringe benefits are paid to directors (in addition to remuneration), this may be subject to FBT. Fringe benefits include reimbursements (which are classified as expense payment fringe benefits for FBT purposes). 

An organisation should consider their individual circumstances and whether they have access to the FBT exemption (generally available to public benevolent institutions and health promotion charities) or the FBT rebate (generally available to certain other registered charities provided they are not health promotion charities, public benevolent institutions or institutions established by a law of the Australian Government, a State or a Territory).

Broadly, fees paid by the organisation to directors as their remuneration will be subject to pay as you go (PAYG) withholding requirements. The rate of PAYG withholding required by an employer is published by the Australian Taxation Office (ATO). An organisation should obtain accounting advice about the PAYG withholding considerations to ensure the organisation accounting systems correctly withhold on payments made to directors.

Director fees are not generally subject to GST. However, in some circumstances, this may become relevant. For example, if the director is invoicing the organisation for their services through a company structure, GST may be payable by the director.

Unlike reimbursements, director fees constitute personal income which will need to be declared as income by directors. Despite this, director fees are not a ‘salary’ and are better viewed as compensation for services performed. Each director should undertake their own enquiries regarding the impact of any director fees on their own personal circumstances, including the impact receipt of director fees may have on their personal income and tax position.

The impact of director remuneration on an organisation’s ability to undertake charitable fundraising will vary depending on the jurisdictions in which it does, or intends to, fundraise. Some jurisdictions have specific obligations relating to declaring or limiting amounts which can be used from funds raised to remunerate directors. For example, in New South Wales, an organisation will need Ministerial approval if it wishes to remunerate directors and be eligible for an authority to engage in charitable fundraising. 

Members may need to approve benefits to directors, including director remuneration, on the basis they are related parties. However, if the remuneration is reasonable given the company and director’s circumstances (including the director’s responsibilities), an exemption may apply. If a company decides to amend its constitution to allow director remuneration, it may choose to include a provision requiring members to approve or ratify this remuneration (even if not strictly required by law), for transparency.

An organisation should have regard to any terms or restrictions in its third-party contracts (current and potential) which prohibit the payment of directors. We recommend an organisation review such documents for any restrictions, as part of its deliberations on whether to remunerate directors.