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Tax Tip! Employee bonuses and directors' fees - a tax deduction before payment

Employee bonuses and directors’ fees can be incurred and be deductible for tax purposes before an actual payment is made.

In order to successfully claim a tax deduction there must:

  • Be a definite liability to pay the amount in question
  • That liability must arise before the end of the year of income (i.e. 30 June 2013)

There is an additional requirement for private companies that the directors’ fees must be reasonable in the context of length of service, duties performed, value of services to the company, commercial practice and similar factors.

This means that the final bonus amounts payable to employees must be determined and the em-ployees must have legally binding entitlements to receive those amounts by year end. Similarly, a deduction for directors’ fees for the year ending 30 June 2013 will not be available unless there is a definite liability to pay the amount by year end. If the company articles (constitution) provide that directors’ fees are to be determined at a board meeting, then the fees will not be deductible until a board meeting is held.

If the above conditions are satisfied before 30 June 2013, then an entity can claim a deduction for employee bonuses and directors’ fees in its 2013 income tax return, even though the payment is not made until some time during the 2014 income year.

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