Director Fees In New Zealand: Legal Obligations For Companies

If you’re running a company in New Zealand, paying director fees can feel like a simple admin task - until you realise it touches a few different legal and tax obligations at once.

Are director fees the same as salary? Do you need board approval? What if the director is also a shareholder (or the only person in the company)? And what paperwork should you have in place so it doesn’t cause issues later with shareholders, your accountant, or (worst case) the IRD?

In this guide, we’ll break down director fees in plain English, from a small business perspective. By the end, you’ll know what director fees are, how they’re usually structured, what your company needs to document, and the common pitfalls to avoid.

What Are Director Fees (And How Are They Different From Wages Or Dividends)?

Director fees are payments a company makes to a director for their services as a director - meaning for governance, oversight, decision-making, attending director meetings, signing resolutions, managing strategic risk, and generally carrying the legal responsibilities that come with being appointed as a director.

That sounds straightforward, but in small businesses the same person often wears multiple hats. For example, a director might also:

• work day-to-day in the business (sales, operations, admin)
• be the majority shareholder (or the sole shareholder)
• be paid in other ways (salary, shareholder-employee salary, dividends, reimbursements)

That’s where it’s important to understand the difference between common payment types:

Director Fees

• Paid for governance and director responsibilities.
• Should be properly authorised and recorded (often via a shareholder resolution or board resolution, depending on your constitution and how conflicts are managed).
• Typically treated as taxable income to the director, and may trigger withholding/PAYE obligations depending on how it’s paid and who is receiving it (your accountant can confirm the correct setup for your company).

Wages Or Salary (Employment Relationship)

• Paid to someone as an employee for day-to-day work.
• Usually requires an Employment Contract and standard payroll obligations.
• Creates different rights and obligations (e.g. leave entitlements, termination process).

Dividends (Shareholder Return)

• Paid to shareholders as a distribution of profit (not “payment for work”).
• Only payable if the company meets solvency requirements and follows the Companies Act process.
• Not the same thing as director fees, even if the director is also a shareholder.

If you’re still deciding which approach suits your business, it can help to step back and map how directors are being compensated overall - many small businesses use a mix depending on the role. (This is also where good documentation makes a huge difference if your company ever raises investment, adds shareholders, or is sold.)

For a broader overview of options, how directors get paid is a helpful starting point.

Do We Need Approval To Pay Director Fees?

In most cases, yes - your company should have a clear approval process for paying director fees, and it should be properly documented.

Why? Because paying director fees is a company decision that affects:

• the company’s cashflow and financial position
• shareholder value (profits paid out as fees reduce retained earnings)
• potential conflicts of interest (especially when directors set their own fees)

In New Zealand, the Companies Act 1993 and your company’s governance documents (especially the constitution) shape how these decisions should be made in practice. In particular, director remuneration generally needs to be authorised in the way required by the Act and/or your constitution (commonly by shareholder approval unless the constitution provides otherwise), and it must be treated as a proper company decision - not an informal drawdown.

Check Your Company Constitution First

Your constitution may set out:

• who can approve director remuneration
• whether shareholder approval is required
• how director conflicts must be handled

If you don’t have a constitution, the “default” Companies Act rules generally apply - but it’s still smart to document decisions clearly. If you’re updating or putting formal governance in place, a Company Constitution can help make processes (like approving director fees) much clearer as you grow.

Board Resolution Vs Shareholder Resolution

Depending on your structure and what your constitution says, director fees might be approved through:

• a board resolution (for example, where the constitution permits the board to set remuneration and conflicts are properly managed), or
• a shareholder resolution (commonly used where directors could otherwise be approving payments to themselves)

In small companies with a sole director/shareholder, it’s still worth documenting the decision properly - not because you’re expecting a dispute, but because clean records reduce risk later (for example, if you bring on investors, sell the business, or get asked to justify past payments).

A practical way to record the approval is a written Directors Resolution (or shareholder resolution, if that’s the appropriate approval pathway for your company).

What About Conflicts Of Interest?

If a director is involved in approving their own fees, that can create a conflict of interest (or at least the perception of one). That doesn’t automatically mean the fees are “not allowed” - it means you should handle the process properly and follow the Companies Act requirements around disclosure of director interests (and any constitution rules about voting/participation).

Common good-practice steps include:

• disclosing the interest to the board and recording it (including in the interests register, where required)
• having non-interested directors approve (if possible)
• having shareholders approve where appropriate
• recording the decision and reasoning (including how the fee was determined)

This is particularly important if you have multiple shareholders, or if the director receiving fees is not the only director making decisions.

How Should Director Fees Be Set (So They’re Defensible And “Business-Like”)?

There’s no single “right number” for director fees. What matters is that the fees are set in a way that is sensible for your business, properly approved, and properly documented.

In a small business context, director fees are often set based on:

• time commitment (hours per month, meeting frequency, ad hoc work)
• responsibility and risk (directors carry significant legal duties)
• industry norms (what similar companies pay for similar governance)
• company stage (startup, growth, mature business)
• cashflow reality (what the company can afford while staying solvent)

One practical approach is to document:

• the basis for the fee (e.g. fixed monthly amount, per-meeting fee, annual retainer)
• the scope (what is included as “director work” vs operational work)
• when fees are reviewed

This kind of documentation can be especially useful if your company has (or plans to have) multiple owners. If you’re working with co-founders or investors, a well-drafted Shareholders Agreement can also set expectations around director appointment, decision-making, and payments - which can prevent disputes later.

Don’t Accidentally Use Director Fees To “Fix” A Bigger Governance Problem

Sometimes director fees become a flashpoint because the underlying issue isn’t the amount - it’s that expectations aren’t aligned. For example:

• One director feels they are doing most of the work and wants higher director fees.
• Another shareholder believes fees should be minimal and profits should be reinvested.
• A director is working operationally but is being paid only “director fees”, without a proper employment or contractor arrangement.

These situations are much easier to manage when your company has clear role definitions and the right agreements in place from day one.

Tax, Payroll, And Reporting: What Small Businesses Need To Watch

Director fees aren’t just a governance decision - they also have real tax and payroll consequences.

Important: This section is general information only and isn’t tax advice. Tax outcomes can vary depending on the facts (including whether the director is NZ-resident, whether they’re also an employee, whether they invoice through another entity, and what IRD classifications apply). You should confirm the correct treatment with your accountant or the IRD guidance for your specific situation.

PAYE/Withholding And Record-Keeping

Director fees are generally taxable income to the director. Depending on how the director is engaged and paid, the company may have PAYE and/or withholding obligations (for example, some director payments are commonly treated as “schedular payments”, while others may be processed through payroll where there is an employment relationship).

In any case, your business should keep clean records of:

• the approval (board/shareholder resolution)
• the amount and timing of payments
• invoices (if applicable) and payment descriptions
• what tax was withheld/remitted (if required) and why that treatment was applied

It’s tempting for small businesses to “just pay it” and tidy it up later, but that can cause problems if you ever need to prove what a payment was for (or why it was taxed a certain way).

GST (Sometimes) And Invoicing

GST can be relevant if a director is supplying services to the company through a separate GST-registered business and issuing tax invoices. However, GST generally doesn’t apply to amounts paid in an employment capacity, and trying to invoice for what is really employment can create classification and compliance risk.

If you’re unsure whether a director should be invoicing, on payroll, or paid under a different arrangement, it’s worth getting accounting advice (and legal advice on the underlying relationship and documentation).

Related Party Transactions

Payments to directors are often considered “related party” dealings because the director has influence over the company. That doesn’t mean they’re prohibited - it means you should be extra careful about:

• having a clear business reason for the payment
• approving it properly (especially where there’s a conflict)
• documenting it properly

If your company is growing, raising capital, or planning a sale, related party transactions will often be reviewed during due diligence. Clean paperwork now can save a lot of stress later.

Director Duties And Personal Risk: Why Getting Director Fees Right Matters

In small businesses, director fees are sometimes treated as a casual arrangement - but directors have serious legal duties, and decisions around payments can be scrutinised if things go wrong.

Directors’ duties under the Companies Act 1993 include (in plain language) obligations to:

• act in good faith and in the best interests of the company
• use powers for a proper purpose
• comply with the Act and the company’s constitution
• avoid reckless trading and not incur obligations the company can’t perform

What does that have to do with director fees? A lot, especially if the company is under financial pressure.

Paying Fees When The Company Can’t Afford It

If a company is struggling, continuing to pay director fees without a proper basis (or without considering solvency) can create real risk.

For example, imagine your business hits a cashflow crunch. Suppliers are overdue, and you’re negotiating payment plans - but the company continues paying director fees as normal. If the company later becomes insolvent, those transactions may be questioned, and directors may face claims depending on the circumstances.

This is why it’s important to understand the broader risk profile directors carry, including potential personal liability as a company director.

“It’s Our Money Anyway” Can Be A Trap

Many owner-directors understandably feel: “I own the company - it’s my money.” But legally, a company is a separate entity. That separation is the reason companies can offer limited liability benefits, and it’s also why you should treat company payments (including director fees) as formal company decisions.

Keeping the boundaries clear helps you:

• protect the integrity of your company structure
• avoid disputes with co-owners
• reduce audit/tax risk
• make your business easier to sell or bring investors into

Key Takeaways

• Director fees are payments for governance and director responsibilities, and they’re different from wages/salary (employment) and dividends (shareholder returns).
• In most cases, director fees should be properly approved (board or shareholder resolution) and recorded in writing, even if your company is small or has one director.
• Your constitution and governance documents often determine the correct approval pathway and how conflicts of interest should be handled (including Companies Act disclosure requirements).
• Set director fees in a way that’s commercial and defensible, with clear scope and review points - especially if there are multiple shareholders.
• Director fees can create tax, payroll, and reporting obligations, so your business should keep clean records and confirm the correct handling with your accountant (this article isn’t tax advice).
• Because directors have legal duties, paying director fees without considering solvency and proper purpose can create risk if the company gets into trouble.

If you’d like help setting up a clear approval process for director fees, updating your company governance documents, or making sure your records are legally robust, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.