Last Updated on September 26, 2024 by
Running a company comes with its perks, but knowing how to tap into your business profits without triggering double taxation or catching the ATO’s attention is a whole other ball game. The good news? Yes, directors can take cash out of their company, but there’s a right way to do it, and it’s important to know your options.
Here’s a breakdown of the three main ways to take cash out of your business without triggering unwanted tax consequences:
- Director’s salary, wages, or fees – One of the simplest ways to pull cash out of your business is by putting yourself on payroll and paying a salary like any other employee. This option is straightforward—just keep in mind the tax implications.
- Dividend payments – Dividends are another popular option for accessing company profits. If the company has already paid tax on its earnings, you could benefit from franking credits, which help reduce the tax you owe on those dividend payments.
- Director loans – Borrowing money from the company? It’s possible under a director loan arrangement, but the ATO heavily regulates it. You’ll need a formal loan agreement and must stick to the repayment terms to avoid turning it into a taxable unfranked dividend.
Can I just draw money out of my business?
Technically, yes, but it’s not as simple as dipping into your company’s bank account. The ATO treats a company as a separate legal entity, meaning profits are first taxed at the company level and again at the personal level if taken out incorrectly.
Double taxation? No, thank you.
To keep the taxman happy and your stress levels low, directors need to use one of the three legal options: salary, dividends, or a director loan.
Here’s how each option works:
Director’s salary, wages, or fees
This one’s pretty straightforward. As a director, you can put yourself on payroll and pay yourself a salary, just like any other employee. The salary you pay yourself will vary based on your company’s cash flow and your personal financial needs, but keep this in mind: once your salary hits $125,000, you’ll be taxed at a higher rate.
On 25 January 2024, the government confirmed updates to individual income tax rates and thresholds, set to take effect from 1 July 2024. These changes are now officially in place.
From 1 July 2024, the tax adjustments include:
- lowering the 19% tax rate to 16%
- reducing the 32.5% tax rate to 30%
- raising the threshold for the 37% tax rate from $120,000 to $135,000
- increasing the threshold for the 45% tax rate from $180,000 to $190,000.
Beyond that threshold, it might be more tax-efficient to balance your salary with other options, like dividends.
Every dollar you take out above that limit gets hit with a higher personal tax rate than if it were left in the company at the corporate tax rate of 25%. So, think about combining your salary with dividends for a smarter tax strategy.
Dividend payments
Keen to tap into your company’s profits without going overboard on personal tax? Dividend payments could be your answer. Dividends allow you to take money from your company’s retained earnings, provided the company is in a healthy financial position.
The best part? If the company has already paid tax on its profits, franking credits can reduce the tax you owe on your dividend payments. It’s a tax-efficient way to top up your personal income and keep the ATO happy. Just make sure your company is in a positive net asset position after paying dividends.
Director loans (Division 7A)
If you’re not keen on salary or dividends, there’s a third option: a director loan.
This allows you to borrow money from your company, but you’ll need to stay on the ATO’s good side by sticking to Division 7A rules. With a proper loan agreement and a clear repayment plan, you’re in the clear to access company profits without triggering immediate personal income tax.
Just make sure to follow the ATO’s strict guidelines—if you don’t, that loan could be reclassified as a taxable dividend, and that means more tax headaches.
Check out this handy Div7A calculator and decision tool on the ATO website to help you understand if it’s a right fit for you or not.
What’s your best move?
Choosing between a salary, dividends, or a director loan—or a combination of all three—depends on your company’s structure, your tax position, and your personal financial goals. Each option has its pros and cons, so understanding the tax implications of each before drawing money out of your company will help you avoid tax surprises.
If you’re unsure which strategy works best for you, it’s always a good idea to have a chat with your accountant.
At SBO Financial, we know tax stuff. We can guide you through these options and help you make the right choice. Let’s have a chat! Contact SBO today.
