How Directors Can Legally Access Business Profits for Personal Use

If you’re a director of a company, one question that may come up is: 

Can I take money out of my business for personal use? 

The simple answer is yes, but you need to follow specific rules and legalities to ensure compliance with the Australian Taxation Office (ATO) regulations. Taking money from your business without following these rules could lead to hefty tax penalties or even legal complications.

There are three main ways that directors can withdraw money from their business: paying themselves a salary or director’s fee, receiving dividend payments, or accessing funds through a director loan. Each method has pros and cons, so it’s important to understand how they work and their implications. 

Let’s break them down in a way that’s easy to understand.

1. Paying Yourself a Salary or Director’s Fee

One of the most straightforward ways to legally take money from your business is by paying yourself a salary, wages, or director’s fees. Essentially, you become an employee of the company and receive regular pay, just like any other employee on the payroll. This method has a few advantages but also comes with specific tax obligations.

When you take a salary, you’ll need to meet the same obligations as any employer, including withholding tax (PAYG) and making superannuation contributions. A key benefit of this approach is that your salary reduces the business’s taxable income, potentially lowering its tax liability. However, there’s a catch when it comes to your personal tax situation. Once your personal income surpasses $125,000, you’ll start paying higher marginal tax rates, which can reach up to 47% at the top bracket.

Key Consideration: While paying yourself a salary is simple, it’s important to ensure that the salary is reasonable and reflects your role in the business. Paying yourself too much could lead to higher personal tax liabilities while paying too little might raise questions from the ATO.

2. Taking Dividends

Another way to extract profits from your company is by taking dividends. Dividends are payments made to shareholders out of the company’s profits and are typically more tax-efficient than paying yourself a large salary. This is because, unlike salary payments, dividends don’t reduce the company’s taxable income but come with the advantage of franking credits.

Franking credits are credits that offset the tax already paid by the company, meaning you won’t be taxed twice on the same profit. This makes dividends a popular method for directors who are also shareholders to access company profits in a tax-efficient manner.

However, not all companies are in a position to pay dividends. Your company must have retained earnings to distribute as dividends, and you must ensure that your business maintains a positive net asset position after the dividend is paid. If your company is struggling financially, paying dividends could lead to risks, including potential claims of insolvent trading.

Key Consideration: Dividends are ideal if your company has sufficient retained earnings and positive cash flow. It’s essential to time dividend payments carefully and ensure your business remains financially stable after making these distributions.

3. Director Loans: Borrowing from the Company

A third option to legally access money from your business is through a director loan. However, this option is heavily regulated by Division 7A of the Income Tax Assessment Act. If not managed properly, these loans can be deemed as unfranked dividends by the ATO, triggering unexpected tax consequences.

Director loans allow you to borrow money from your company, but strict rules apply. For instance, the loan must be properly documented, and there must be a formal loan agreement in place. The loan must also comply with the ATO’s interest rate guidelines and have a repayment schedule in place. Failing to meet the terms of the loan could result in the ATO treating it as an unfranked dividend, which could then be taxed at your marginal tax rate.

There are also repayment terms to consider. Loans need to be repaid within seven years (or 25 years if the loan is secured by a registered mortgage). In addition, minimum annual repayments of both principal and interest are required to avoid Division 7A penalties.

Key Consideration: Director loans provide flexibility, but they come with strict compliance requirements. Always consult with your accountant to ensure you are following the correct loan terms and staying compliant with Division 7A.

Balancing Your Options: What Works Best for You?

There’s no one-size-fits-all approach when it comes to taking money out of your business. Each option—salary, dividends, or director loans—has different tax implications and financial considerations. For many directors, the best solution is a combination of the three, depending on the company’s financial health and personal financial goals.

For example, you might decide to take a modest salary to cover day-to-day living expenses, supplement that income with dividend payments to access company profits, and use a director loan for larger personal expenses, such as purchasing a home. By carefully balancing these approaches, you can maximise your financial efficiency while ensuring the company remains in good financial standing.

Seek Expert Guidance

Navigating the complexities of accessing business profits for personal use requires careful planning and expert advice. At Growth iQ, we specialise in helping directors structure their remuneration in the most tax-effective way possible. Whether it’s optimising your salary, timing dividend payments, or ensuring compliance with director loans, we’re here to guide you through the process.

Ready to explore your options and make the most of your business profits? Contact Growth iQ today to discuss the best strategy for your financial goals.