How much should you actually pay yourself from your company? Should you take a salary, distribute dividends, repay money the company owes you, or leave profits sitting in the business?

Many Australian business owners make the mistake of transferring company funds whenever they need personal cash, assuming their accountant will sort everything out at tax time. Unfortunately, these transactions can create unexpected tax liabilities, director loans and compliance issues.

In this episode of The Money Meeting, Jacob Fahmy, of Latitude Accountants, explains how business owners can structure their payments, manage company profits, and avoid costly tax mistakes.

The key is understanding that company money and personal money are not interchangeable.

1. Determine How Much Salary You Should Pay Yourself

Your salary should reflect two important considerations:

• How much money you need to support your personal lifestyle.
• What your contribution to the business is commercially worth.

Start by calculating your household expenses, including mortgage repayments, groceries, insurance, school fees and other financial commitments.

For example, if your household requires $6,000 per month, establishing a consistent salary can help you avoid making irregular withdrawals from the company.

However, your personal financial needs should not automatically determine your entire salary.

Consider Your Commercial Value

Ask yourself: If you stopped working tomorrow, how much would the business realistically pay someone to replace you?

If your role is commercially worth $90,000 annually, paying yourself $180,000 simply because the company has additional profits may not be the most appropriate strategy.

A properly structured salary also requires consideration of PAYG withholding, superannuation and relevant employment obligations.

2. Check Whether Your Company Already Owes You Money

Before increasing your salary or declaring dividends, review your company’s balance sheet.

You may have previously contributed personal funds to establish the business, purchased equipment using your own money or covered company expenses during periods of limited cash flow.

If these contributions were genuinely recorded as loans to the company, you may be entitled to repayment.

For example:

• Your company owes you $25,000.
• You require $10,000 for personal expenses.
• The company repays $10,000 of the outstanding loan principal.

A genuine repayment of loan principal generally does not create additional taxable income.

This highlights an important distinction: your company’s bank balance shows available cash, while its balance sheet helps establish its financial obligations.

3. Decide Between Retained Profits and Dividends

Once your salary and outstanding shareholder loans have been considered, the next question is what to do with remaining company profits.

Should you withdraw everything or retain some funds within the business?

The answer depends on your company’s financial position and future requirements.

When Should You Leave Profits in the Company?

Consider whether the business needs additional funds for:

• Working capital and operational expenses.
• Hiring employees or purchasing equipment.
• Stock and inventory.
• Repaying business debts.
• Maintaining an emergency cash reserve.
• Future expansion and investment.

For example, if your company has $30,000 available but requires $20,000 for upcoming expenses, retaining that amount may be commercially sensible.

The remaining $10,000 could potentially be considered for distribution.

Eligible base rate entity companies may pay company tax at 25%, while other companies generally pay 30%. However, company profits are not automatically your personal funds.

Understanding Dividends and Franking Credits

Dividends allow companies to distribute profits to shareholders, subject to applicable legal and tax requirements.

A franked dividend carries franking credits representing company tax already paid, which may reduce the shareholder’s personal tax liability.

An unfranked dividend does not carry those credits.

Before declaring dividends, consider your personal taxable income, available franking credits, company cash flow and the timing of the distribution.

This is why proactive tax planning matters. Paying company tax at 25% does not necessarily mean you can access those profits personally without further tax consequences.

4. Avoid Division 7A Problems With Personal Withdrawals

One of the biggest mistakes business owners make is treating their company’s bank account like a personal account.

Consider this situation:

You withdraw $5,000 for personal expenses, transfer another $3,000 several weeks later and use company funds to pay a private bill.

Over time, these transactions accumulate.

If the withdrawals are not properly treated as salary, dividends, genuine reimbursements or repayments of money owed to you, they may create a shareholder or director loan.

This is where Division 7A becomes particularly important.

Division 7A is designed to prevent private company profits from being accessed by shareholders or their associates through certain payments, loans or forgiven debts without appropriate tax treatment.

Depending on the circumstances, an outstanding loan may need to be repaid or placed under a complying Division 7A loan agreement by the relevant deadline.

These arrangements can involve:

• Benchmark interest rates.
• Minimum yearly repayments.
• Ongoing documentation and compliance.
• Potential unfranked deemed dividends if requirements are not satisfied.

What initially appears to be a harmless personal transfer can eventually become a substantial tax problem.

The safest approach is to identify and document the purpose of every withdrawal before transferring company funds.

5. Understand How Personal Services Income Rules Affect Your Pay

Another commonly overlooked issue is Personal Services Income (PSI).

PSI generally refers to income earned mainly through an individual’s personal skills, expertise or efforts.

This can affect professionals such as IT consultants, engineers and management consultants operating through company structures.

For example, imagine your company earns $100,000 primarily through your personal consulting work. You pay yourself $60,000 and retain the remaining profit, expecting it to be taxed solely at the company rate.

Depending on your circumstances, PSI rules may attribute income back to you personally, even when the company receives the payment.

However, these rules are not automatically triggered simply because you operate a professional services business. Relevant tests, exemptions and the nature of your business activities must be considered.

Businesses generating income through employees, systems, assets and broader commercial operations may have different tax outcomes.

This makes professional advice essential before deciding to retain profits within your company.

A Practical Framework for Paying Yourself

Jacob recommends approaching business owner payments through a structured process:

1. Establish your salary: Consider personal living expenses and your commercial contribution to the business.
2. Review existing shareholder loans: Identify genuine amounts the company already owes you.
3. Plan your profits: Determine how much the business needs to retain and whether dividends are appropriate.
4. Classify every withdrawal: Record whether payments represent salary, dividends, reimbursements or loans.
5. Check additional tax obligations: Consider Division 7A, PSI and other applicable rules.

Ideally, review your payment strategy at the beginning of each financial year, around 1 July, rather than waiting until tax time.

Proactive planning provides more opportunities to manage cash flow, understand tax obligations and prevent unnecessary complications.

Frequently Asked Questions About Paying Yourself as a Business Owner

Can I transfer money directly from my company to my personal account?

Yes, but the transaction must have an appropriate purpose and accounting treatment. Unplanned withdrawals may create Division 7A implications.

Is it better to pay myself a salary or dividends?

It depends on your personal income, company profitability, cash flow and tax circumstances. A combination may be appropriate.

Can I leave all my profits inside my company?

Generally, companies can retain profits for legitimate business purposes. However, PSI and other applicable tax rules may affect how certain income is treated.

Are shareholder loan repayments taxable?

Repayment of genuine loan principal is generally not additional taxable income. Proper records are essential to substantiate the original loan.

Get Professional Tax Planning Advice From Latitude Accountants

Paying yourself correctly is about more than choosing a salary. It requires understanding your company’s financial position, personal circumstances and tax obligations.

At Latitude Accountants, our Chartered Accountants help Australian business owners develop proactive tax strategies, manage company structures and make informed financial decisions.

Don’t wait until tax time to discover that your withdrawals have created an unexpected liability.

Accounting Done Right. The Latitude Way.

📍 Sydney Olympic Park | Marrickville | Melbourne | Loxton | Adelaide
📞 1300 706 597
📧 info@latitudeaccountants.com.au

Disclaimer

This article provides general information only and does not constitute financial, tax, accounting, legal, property or business advice. Tax laws and individual circumstances vary. Consult a qualified accountant or tax adviser before making decisions about salary payments, dividends, shareholder loans or company profit distributions.