It’s your business, your hard work and your money. So why can’t you just transfer money into your personal account whenever you want?
Well, depending on your business structure, it might not be that simple.
One of the most common areas of confusion for business owners is understanding how to pay themselves correctly.
While taking money from your business might seem straightforward, the way you do it can have important tax consequences.
Sole trader or company? There’s a difference.
If you’re operating as a sole trader, you can generally withdraw money from your business for personal use.
These withdrawals are known as drawings.
However, drawings aren’t a business tax deduction. As a sole trader, you’re generally taxed on your business’s taxable profit, not simply the amount you transfer to yourself.
Companies work differently.
A company is a separate legal entity, meaning the money sitting in the company’s bank account doesn’t automatically belong to its directors or shareholders personally.
How can company owners pay themselves?
Depending on the circumstances, money may be paid through:
- Salary or wages
- Director fees
- Dividends
- Repayment of money previously lent to the company
- Properly documented loan arrangements
Each option can have different tax and reporting requirements.
For example, salary payments may involve PAYG withholding, payroll reporting and superannuation obligations.
Dividends have their own rules, including potential franking credits.
What happens if you just transfer money out?
This is where things can become complicated.
If a private company provides money or other benefits to shareholders or their associates, Division 7A rules may apply.
In certain circumstances, amounts that haven’t been correctly managed can be treated as unfranked dividends for tax purposes.
That could result in an unexpected personal tax bill.
How much should you be paying yourself?
The answer depends on your business.
It’s worth considering:
- How profitable your business is
- How much cash is available after business commitments
- Your personal living expenses
- Upcoming tax and superannuation payments
- Whether the business needs money for future growth
Paying yourself too much can place pressure on business cash flow.
Paying yourself too little can also create unnecessary financial stress at home.
The goal is to find a sustainable balance.
At PLH Accountants, we help business owners understand their options and establish appropriate ways to take money from their businesses.
Because earning money through your business is one thing. Taking it out correctly is another.
Before making large personal withdrawals, speak with your accountant. A quick conversation now could help prevent a much bigger issue later.