I have some questions regarding the payment of director fees which the corporate secretarial firm we hired did not have an answer to.
My confusion stems from this: (Tax Guide)
For director’s fees approved in arrears, the director has already
rendered the requisite services for the accounting year concerned.
However, the director’s fees must be disclosed to and approved by
members of the company before they can be paid to him. Hence, the
earliest date on which the director is entitled to the director’s fees, is
the date the fees are voted and approved at the company’s AGM.
- Are we allowed to pay out director's fees before the fees are approved in arrears during the next AGM?
You cannot pay directors fees until they have been approved at an AGM OR an EGM (extraordinary general meeting). For small, privately held companies, where the shareholders and directors are one and the same, an EGM is a common way of conducting business. Therefore, so long as all corporate documents reflect that proper notice has been given, you could hold an EGM tomorrow morning and approve whatever fees you want.
- If so, should the fees be accrued under this accounting year or the next accounting year in which the relevant AGM was held?
I'm not aware of any GAAP rules on this. But if your intent is to pay directors fees this accounting year, and the only thing keeping you from doing so is the AGM (but see also the EGM), then you would accrue in the current year to properly reflect the liability for fees that you have. You would debit an expense account called Directors Fees, credit a liability account Directors Fees Payable. When you finally pay the fees, you debit the payable account and credit cash.
- Should the director's fees (paid this year) be declared in personal income tax YA 2018 or YA 2019?(since the AGM is held in 2018 and by definition: the director is only entitled to the fees in 2018)
The fees become personally taxable on the date of the AGM or EGM or on the date specified in the resolution authorizing the fees, but not earlier than the AGM/EGM. So, if you hold an EGM tomorrow morning, authorizing fees payable on Oct 31, then the director has taxable directors fees for 2017, regardless as to whether or not she actually receives the cash payment for the fees.
If you do not authorize the fees in arrears until an AGM in 2018, then the fees are not personally taxable to the director until 2018.
One final example: If you were to authorize fees in advance in the same 2018 AGM, the fees would not be taxable until such time as the director completed the work paid for by the fees. This gives you lots of flexibility. You can say work was completed in 2018 and pay the fees, or you could drag it over to 2019.
However, in my business, we used directors fees as a way of paying a bonus for a very profitable year. Thus, all of our fee payments were typically made at an EGM held on Dec 25 of the current year so that the fees would be taxable in the current year. But, if you wanted to slide the director's personal taxes into the next year, you could hold the EGM on Jan 5.