Company wages, dividends & drawings
Company owners can take profits as
- Wages
- Dividends
Wages
We recommend setting a realistic wage which
- reflects your time and skills
- you can live off without the need to take additional drawings
- takes into consideration other business & individual factors (see below list)
Pro’s
- consistent income
- tax is withheld
- super guarantee is paid
- covered by Work Cover insurance
Con’s
- cash flow
- may increase payroll tax
Dividends
Company profits can either be retained by the company or paid to shareholders as dividends
Franked dividends = profits which have been taxed
Unfranked dividends = profits that have not been taxed
Shareholders include the dividends in their personal tax returns and are taxed at marginal tax rates. If company tax has already been paid the shareholder receives a credit which prevents double taxation
Owner Drawings
We DO NOT recommend taking drawings
The ATO has put rules in place (Division 7A) to discourage company owners from taking drawings
The rules are aimed at preventing owners from taking company profits which have been taxed at 25% or 30% instead of paying the profits as wages or dividends and being taxed at marginal tax rates up to 47% including the 2% Medicare Levy. Even if your tax rate is below the company rate you will still be caught by these rules
Where a business owner takes drawings it will be treated as a loan
If the loan is not paid back by the time the company's tax return is due or the actual date of lodgment then the loan needs to be converted to a Division 7A loan
Division 7A Loans
- must be paid back within 7 years
- minimum repayments must be made each year
- interest applies
Shareholders can make loan repayment in 3 ways
- by physically paying the $ back to the company
- by paying additional wages without taking the $
- by paying a dividend without taking the $
Shareholders are effectively forced to either repay the loan or include the drawings in their personal tax returns
Before paying yourself a wage & business profits you need to consider how it will affect the following, where applicable:-
Business
- Profits
- Cash flow
- Work cover insurance premiums
- Superannuation guarantee
- Payroll tax
- Director (Div 7A) Loans
- Business finance applications
- Valuing your business
- Selling your business
Individual
- Taxable Income
- Adjusted Taxable Income – including reportable super & reportable fringe benefits
- Income tax rates including the tax-free threshold
- Tax return offsets
- Government benefits such as Child Care Benefit & Family Tax Benefit
- Study and training loan repayment thresholds and rates eg HECS
- Medicare levy
- Medicare levy surcharge
- Leave entitlements
- Income protection insurance claims
- Work cover insurance claims
- Concessional superannuation contribution limits
- Government super co-contribution
- Div 293 tax
- Personal finance applications - banks will use your latest notice of assessment and will also want to see the business is profitable after adding back items such as depreciation
- Child support