Understanding Salary, Dividends, and Tax Considerations
As a business owner, deciding how to pay yourself isn’t just a matter of preference—it can significantly impact your tax obligations, cash flow, and superannuation. The best payment method often depends on your business structure and long-term goals. In this article, we’ll break down the key options and their tax implications to help you make informed decisions.
👔 Pay Yourself a Salary
This method is common among company owners or trust beneficiaries working in the business.
✅ Pros:
- Provides stable income and superannuation contributions.
- PAYG tax is withheld automatically, helping you manage tax liabilities throughout the year.
- Makes loan applications easier due to regular income evidence.
⚠️ Considerations:
- You must register for PAYG withholding and process payroll.
- Superannuation (currently 11% as of FY2024–25) must be paid on top of the gross wage.
- The company claims the salary as a deductible expense.
🧾 Tax Implications:
- The salary is taxed at your individual marginal tax rate.
- The business receives a tax deduction, reducing its taxable income.
💰 Take Dividends (for Companies)
Dividends are distributions of after-tax profits from your company.
✅ Pros:
- Simpler than running payroll if you’re not working full-time in the business.
- Dividends may come with franking credits, which offset your personal tax liability.
⚠️ Considerations:
- The company must have retained earnings and a franking account balance to distribute franked dividends.
- No compulsory superannuation or workers’ comp included.
- Cannot be claimed as a deductible expense by the business.
🧾 Tax Implications:
- You pay personal tax on dividends, but franking credits reduce your tax liability.
- Dividends are taxed at your marginal rate, but with possible tax savings if franked.
💵 Drawings (for Sole Traders & Partnerships)
If you operate as a sole trader or in a partnership, you can take drawings from the business.
✅ Pros:
- Simple and flexible – take money as needed.
- No need to process payroll or pay super (though it’s advisable for retirement planning).
⚠️ Considerations:
- Drawings are not deductible expenses.
- You must still pay tax on the entire business profit, not just what you draw.
🧾 Tax Implications:
- Business profits are taxed at your individual tax rate, regardless of how much you withdraw.
- You’re responsible for your own super contributions.
💼 Trust Distributions
If your business is run through a discretionary or family trust, you may receive trust distributions.
✅ Pros:
- Potential for tax planning through distribution to family members in lower tax brackets.
- Offers asset protection and income flexibility.
⚠️ Considerations:
- Must make distributions before 30 June each year via a trustee resolution.
- Distributions must be reported and taxed in the beneficiary’s return.
🧾 Tax Implications:
- Distributions are taxed at the beneficiary’s marginal rate.
- No PAYG withheld or super unless structured accordingly.
🔍 Choosing the Right Method
| Structure | Payment Option | Taxed As | Super Required? |
| Sole Trader | Drawings | Business income (individual) | No |
| Partnership | Drawings | Business income (individuals) | No |
| Company | Salary / Dividends | Individual salary or dividends | Yes (if salary) |
| Trust | Distributions | Individual income | No |
📌 Final Tips
- Mixing methods is often effective: e.g., a base salary plus dividends.
- Super contributions are key for retirement and tax planning.
- Work with your accountant to tailor a structure that suits your income needs, tax position, and long-term goals.
🤝 Need Help Paying Yourself the Smart Way?
At SWOT Accountants, we help business owners optimise their income strategy with a balance of compliance, flexibility, and tax efficiency. If you’re unsure about the best approach for your business, reach out for a personalised consultation.