If you run your business through a company structure, it's crucial to understand the proper ways to transfer funds into your personal account. Simply withdrawing cash from the company’s bank account isn’t allowed; these funds are classified as company profits. To avoid potential tax complications, you need to choose a legitimate method for extracting these funds. Here are four primary ways to pay yourself from your company:
1. Salary
One straightforward way to draw income is to pay yourself a salary. This typically involves setting up a regular payroll schedule—whether weekly, biweekly, or monthly. Your gross salary will be used to calculate tax and superannuation contributions, and you'll receive the net amount in your personal account. Remember to report this income on your personal tax return. Additionally, your salary will be considered a deductible expense for the company.
2. Directors’ Fees
Directors’ fees serve as compensation for your role as a company director. Like salaries, these payments must go through payroll, including tax withholding and superannuation calculations. Directors’ fees can be less frequent than regular salaries and may be used for directors who aren’t actively involved in the day-to-day operations. These fees are also deductible for the company and will contribute to your personal taxable income.
3. Dividends
As a shareholder, you can also receive dividends, which are distributions of the company’s profits. Once paid, dividends count as income in your name. They can be franked, meaning the company has already paid tax on those profits, or unfranked (no tax paid) or partially franked (some tax paid). If you receive a franked dividend, you may not owe additional tax, and if your marginal tax rate is lower than the company's rate, you could even receive a refund. Keep in mind that dividends must be distributed proportionally to your shareholding.
4. Loans
Transferring company funds to your personal account without classifying it as a salary, directors’ fees, or dividends may result in a loan. If not structured properly, this could lead to complications under Division 7A of the Income Tax Assessment Act. This regulation sets stringent guidelines for loans from companies to shareholders. Violations include:
Lending money or transferring property below market value.
Not having a formal loan agreement.
Failing to repay the loan by the end of the tax year.
Relieving a shareholder or their associate of debt.
Without a compliant Division 7A Loan Agreement, these transactions could be treated as unfranked dividends, leading to higher tax liabilities. Thus, it’s essential to seek tax and legal advice if you consider establishing a Division 7A loan.
Conclusion
Understanding the correct methods for paying yourself from your company can save you from tax issues down the line. If you suspect there may be Division 7A complications in your business structure, don't delay and contact Symmetry Accounting & Tax to ensure you remain compliant as things can get very ugly if you leave it too late.
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