“Can I draw money out of my business?”
The answer is yes you can, but it’s not as simple as drawing money out of the business bank account for your own personal use. The ATO may treat this as separate income and you could be taxed twice. The company, as a separate legal entity, will be taxed on that profit initially, and you will be taxed again on the same profit in your personal income in your tax return.
As a director or shareholder, if you want to benefit from your company’s profits, do it the right way. There are 3 ways you can draw money out of your business for personal use.
Tune in to find out more.
Director’s salary, wages or director’s fees option
The first, and the most obvious one, is the director’s salary, wages or the director fee option.
This one is pretty simple, as you are essentially putting yourself on the payroll, and paying yourself a salary as an employee of the company, with all relevant PAYG and Superannuation obligations considered.
Every business is different, so the salary a director pays themselves will differ depending on the nature of the business and its cash flow.
When considering what amount to pay yourself, a director should always consider individual marginal income tax rates. For example, at $125,000, the marginal income tax rate for an individual surpasses the corporate tax rate of 25%. Therefore, every dollar a director pays themselves above $125k, will be taxed higher in their income tax return, when compared to leaving the profits in the company.
Above this $125k threshold, a combination of salary and dividends may be a more tax-effective remuneration strategy for the director.
Ultimately, however, it’s up to you as the director to decide how much you pay yourself as a salary.
The Dividend Payment Option
Whether you’re paying yourself a low salary, or a benchmark salary of $125,000, you could use the dividend payment option to access retained earnings from the company as a top-up to your personal income.
Whatever profit the company has made, we can pay that out as dividends to the company shareholders twice a year: the interim dividend, and the final dividend.
Should you choose to go down the path of dividend payments, you need to have retained earnings within the company, and the company must remain in a positive net asset position after the dividend has been paid.
If the company has already paid tax on profits, prior to paying out a dividend to shareholders, franking credits will be available.
These are credits for the income tax that has already been paid by the company, which are subsequently passed on to the shareholder when the dividend is paid. These credits reduce the amount of tax you pay on the dividend income when included in your personal income tax return.
The Director Loan Option
The third option for Directors and shareholders to draw money out of the company is through a Director Loan. These arrangements are heavily regulated by the ATO under the provision of Division 7A, however, where certain conditions are met shareholders may be able to borrow money from the company and pay the company back over a 7-year period.
With a complying loan agreement in place, which dictates the minimum annual repayments of principal and interest over the loan term, the loaned money from the company is not treated as taxable income for the shareholders.
This can be an attractive option for company shareholders looking to access company profits without triggering immediate income tax consequences for themselves personally.
Where directors and shareholder access company funds without complying with ATO provisions, the whole loan may be treated as an unfranked dividend from the company and taxed in the hand of the shareholder in the year in which the funds were provided. This can have severe tax consequences for both the company and the shareholder.
These are the three different options for directors and shareholders to draw money out of a company for their own personal use – the Director’s Salary or Wages, Dividend Payments, and the Director Loan option.
You may wish to consider using a combination of all 3 to reduce your tax liabilities.
Each option has benefits and drawbacks. So it’s important to understand how each option works and if it’s right for your company, your tax structure, and your personal circumstances. You should always consult your accountant first to ensure you fully understand the tax consequences of each strategy before drawing money out of your company.
Of course, feel free to reach out to our specialist tax team to discuss your remuneration strategy, and what suits your financial circumstances and tax position. Email us today at admin@elementsag.com.au or call us on 07 3878 9181.
