New to running a business and unsure how to pay yourself? Have you been regularly charging personal expenses to your business whenever you need to? Or do you simply take whatever you want, whenever you want and leave it to your bookkeeper/ accountant sort it out at the end of the financial year?
Fret not! There are a few ways to pay yourself from your business.
Here are some of the ways in brief:
Pay yourself a formal wage
Under this method, you are treated as an employee of the business (in a trust or company structure). Net wage payments will made after deducting PAYG withholding taxes. In order to do this, your business must be registered for ‘PAYG Withholding’ and also regularly lodge the data to ATO via Single Touch Payroll (STP). Superannuation is also payable at Superannuation Guarantee rates (currently 9.5%).
Both the gross wage and the superannuation expense are tax deductible expenses for your company or trust.
Note: You may also pay yourself director’s fees, but be aware that this is subject to PAYG taxes and superannuation guarantee as well.
Pay yourself as a “contractor” to the company
Under this arrangement, the business engages you as a contractor and pays you a fee, which is then declared as income in your personal tax return within the “sole trader business schedule.”
In order for this to occur, you must have a personal ABN. This method is quick and easy and avoids the company having to register for ‘PAYG Withholding’. The business also avoids paying superannuation on the contractor fees paid.
Pay yourself a “dividend” from your company or ‘distribution’ from your trust.
For the company, this involves paying yourself out of “after tax” company profits. Basically this means that a franked dividend is declared and paid by the company to you. The franked dividend will be listed within your personal tax return and you will receive a credit of any company tax paid by the company (ie. franking credits).
For the trust, this involves making a trust distribution out of ‘before tax’ profits of the business. The distribution is declared and paid by the trust to you as the beneficiary. The distribution will be listed within your personal tax return and subject to taxes at your marginal tax rate. The trust will not be liable for taxes on profits made, provided all of it is distributed to beneficiaries.
If you have contributed a sum of money to your company or trust in order to set it up (i.e. you have paid for expenses on behalf of your company personally), this is recorded in the books as a loan from you to the business. You are then entitled to withdraw this money from the business tax-free at any time depending on the cash flow situation of the business.
However, when you withdraw more money out of your business than what you have loaned to it, this needs to be treated as you borrowing money from your business.
Drawings require the formalisation of a loan agreement which will include interest payable to the business. You will be required to pay interest back to the business as well as tax on the cash received.
Where a loan agreement and interest charge are not put in place by year end, the drawings will be treated as unfranked dividends to you, with tax payable at your marginal rates (ie. Division 7A Dividend). If you draw from your business, a tax deduction is not available to your business.
To put it simply, this means you can pay up to 73.5 per cent tax (ouch!) And that’s not a typo error. Here’s how it is calculated: ie. 45% marginal tax rate plus 2% Medicare levy plus 26.5% company tax rate (due to the company not having the tax deduction).
Disclaimer: This blog post has been simplified to cover some key points of how you may pay yourself from your business. This should not be construed as advice from Glint Accountants. There are many other factors to be considered and each business situation is unique. Therefore, we encourage readers of this blog post to contact Glint Accountants for assistance with their specific circumstances.
Geraldine Lee is a Fellow of CPA Australia and successful business owner with experience with all of the above. Contact us at Glint Accountants for assistance if you are new to running a business and are unsure how you may pay yourself from your business. We are able to assist with Payroll set-up, Single Touch Payroll (STP) lodgements, PAYG withholding registration and BAS lodgements.