How to Pay Yourself in a biz

Treating the company bank account like a personal ATM feels great, right up until it's NOT!

In this episode, Aly G and Leethal Lee unpack the ways Australian biz owners can pay themselves from a company, why "just transferring funds" is not a strategy, and how a seemingly harmless habit can snowball into a very big later me problem.

They walk through the options: salary and wages (think Single Touch Payroll, PAYGW, super, and why the "we'll sort it at year end" approach really doesn't fly anymore), versus dividends and drawings. They also break down what Division 7A actually is in plain English: has the company paid money or expenses on your behalf without the right tax being paid? Once you see it that way, the rules get a lot less scary.

From there, it's about the questions that drive smart tax planning: what can the business genuinely afford after tax, suppliers, and growth? What mix of wages and dividends suits your situation? They also bust the "double tax" myth!

Plus, the sneaky stuff that quietly ends up in loan accounts: private expenses on the company card, the family holiday that was technically a business trip, entertainment, perks, and all the things that can trigger Fringe Benefits Tax or worse.

If you want to pay yourself properly and actually sleep at night, this one's for you. Press play, subscribe, share it with a fellow biz owner, and leave a review so more people stop learning these lessons the expensive way.

Not so keen on listening or need more info, check this out:

📖 Blog: How do i pay myself in a company + What is Division 7A

💥Bold moves. Big wins. Leading the way.

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Transcript

Why Paying Yourself Matters

SPEAKER_00 0:13

Today we're going to be talking about paying yourself because just transfer some money from the business account is not actually a strategy. It might also be a Division 7a problem waiting to happen. Today we're covering how to remunerate yourself properly and why the ATO cares very much about where that money goes and how it's being taxed. We're going to try and make it as less dry as possible. But look, with something so deep, um, it's yeah, it's a challenge that we're willing to face. Now, hi Lee, how are you doing? Oh great, I'm so excited about this. This is actually something that we get asked a lot about. In fact, we have a blog on this one. It has the most views of all of them by far. Because it is something that people really struggle with. Now, this is mainly if you are trading through a company. Yes. Right. So one of the first things people say is, but how do I buy myself?

SPEAKER_01 1:11

Um well that's a good that's a good question. I I think the really the thing you've really got to remember about a company is you and the company are separate legal entities. So what is in the company's bank account is not yours.

SPEAKER_00 1:28

It's so hard to divorce yourself of that because people do not think that.

SPEAKER_01 1:32

Yeah, and so legally it is not yours. And the only way you can really take that money is by paying it to you as a wage, dividend, whatever, but a legally like it's a legal contract kind of thing. It has to come out to you in a way where you are going to have to pay tax on it. That's right. Um, unless obviously you put money into the company in the first place and you're owed some money.

Salary Setup And STP Reality

SPEAKER_00 2:02

So, as in, when you've contributed money and you haven't drawn that money back out, you can take that out tax-free. Yes. But the moment you start to draw more than what you've put in, yeah, that's when we start to look at how do we remunerate yourself in a company. Yes. And there's two with there's two ways with um, I guess you can have a shared approach if you wanted to. So the first one is just the typical employee, salaries and wages. You can pay it daily, weekly, monthly, annually, whatever you want to do. You can pay it whatever you like. Yeah. And it's going to be tax calculated on that, and you need super and return to work.

SPEAKER_01 2:32

Yeah, and you're just an employee. It goes on, it gets reported to the ATO via the normal STP um wages system. And yeah, you get your super benefit of it, yeah, is you get super and you're an employee for return to work, which means you're covered for them um with insurance.

Division 7A Loans Explained

SPEAKER_00 2:49

Can be quite a cheap insurance policy. Now, the thing about, well, how much do I pay myself is is a massive. But I also want to say many years ago, before single-touch payroll, you kind of, you know, were able to just make this up at the end of the year. That doesn't actually fly anymore. You do actually have to pay yourself a wage. You have to have a registered STP compliant software, you need to lodge it and file it with the ATO, you need to do your annual rec. So you actually need to be on the books, right? So we're gonna get into how much we pay ourselves in a minute. But so what that's one of the ways, salaries and wages, right? The other one is if you don't want to give yourself salaries and wages, you can draw out the money, but that's going to lead to a dividend or a Div 7A loan. That's right. Now, a Div 7A loan is where you've taken money out of the business, but you haven't repaid it at the end of the year. It's as simple as that. The ATO says you can have that money, but you're going to have to be taxed over a length of time. Seven years unsecured, 25 years if it's a secured loan. Yeah.

SPEAKER_01 3:55

So it's just a loan. It's a loan. Your company has loaned you money. Um, you will go on a loan agreement, which the standard advised by the ATO is um seven years. So the reason it's called a Div 7A loan is because that is the division of the tax legislation that these rules sit under. That's right. So that's why, like you might, what's a Div 7A loan? It's literally just the legislation. And that's how we're guided by what you have to do.

SPEAKER_00 4:21

And so every year there is a new Division 7A loan. So what we see uh after a period of time is that after your company's been training for some time, you might have seven years worth of Division 7A loans on 70 repayment plans.

SPEAKER_01 4:33

Yep. You're just taxing your tail, really.

SPEAKER_00 4:35

Um It's kind of like kicking the tax can down the road. Yeah.

SPEAKER_01 4:39

Right because you have each year you then get charged interest on your loan, um, which is accessible.

SPEAKER_00 4:46

And might I actually say, yes, it's accessible, you pay tax, but also that interest rate is fairly high. And in fact, it can be higher than most personal home loan, right?

SPEAKER_01 4:57

Which is really high and it really starts to add up.

SPEAKER_00 4:59

It bites.

SPEAKER_01 5:00

Yep. Um, so you're adding interest onto that loan, plus then you have to make a minimum repayment, which that minimum repayment is either you've got to put the money back into the company or you've got to pay yourself something that's going to be taxed in your own. Which is usually a dividend.

SPEAKER_00 5:16

And your accountant usually helps you do that when you're doing tax planning or when they're doing the accounts at the end of the year, and it can either be the minimum amount or it can be more than that, depending upon what average tax rate you have or want to pay.

SPEAKER_01 5:27

And that's where tax planning comes into play.

SPEAKER_00 5:30

Yeah. Absolutely. And this is where I get a lot of conversations. Should I put my money in an offset account? Well, that's actually a really big question to answer. But just looking at the interest rate, um, I highly suspect yes. We say these days keep it in the company and put it into a term deposit or a high interest earning account, or do something else with it. Don't put capital assets. I mean, that's a completely different topic. Yeah. But um, yeah. More retain the money in the company.

SPEAKER_01 5:59

The advice, I guess, has definitely changed over the years. In the in the past, we probably would never have said go put an investment in a company. But now it it it is a it's a possibility. And it's a a nice taxi environment. You you capped it 25% generally in your company. Um, so yeah, putting investing in your company may well be the strategy now, which you know, 10 years ago would never have been thought about.

SPEAKER_00 6:26

No, not at all. And so, you know, a lot of people are like, oh, I don't want to be in Division 7A, and we totally get it. And everybody has a different risk profile, so it's important that you make the decision for you. And so what we see with how how are you going to remunerate yourself in the company, it's usually a combination of salaries and wages. So you kind of know what's that amount of.

SPEAKER_01 6:45

So that's gonna be your base level, really. That's yep, what do you need week to week to live?

SPEAKER_00 6:51

Yep.

SPEAKER_01 6:51

What cash flow do you need minimum in your own name? That's what you've got to take, provided your business can afford to pay that to you, by the way.

How Much Can You Afford

SPEAKER_00 7:00

That's the bigger question. Let's go there. So a lot of people say, Well, what can I afford to pay myself in a business? And I go back to this model of it's not just what's sitting in your bank account, right? We go back to go to our cash flow episode if you want to talk about that. It's about from that bank account, what is hived off for tax, what do I need to pay to suppliers, what do I need to retain in there if I need to purchase any assets or grow, etc. And what is left is put is potentially yours. And then we look at how do we get that out to you in the most tax-effective way. Yeah. Through salaries and wages or dividends and drawings.

SPEAKER_01 7:36

Or do we take it out and do or or do you leave it in the company and do some other things within the company? Um, and that will then allow you to push the money out over time and and get a better plan. But it it is a hard question when you just go, what should I pay myself?

SPEAKER_00 7:54

It's it's much bigger. And I, you know, as a sole trader, you know, what what comes in you get taxed on, that's yours. But because you're paying tax at that point that you're drawing it pretty much.

SPEAKER_02 8:05

Yeah.

SPEAKER_00 8:06

Um, whereas in a company, it's really the only vehicle that you can retain profits and pay that flat tax rate at 25 cents in the dollar. But, and this is the caveat, if you want to take the money out of the company, which let's be honest, most people do, yeah, then there's another taxation point. And that's where you need to work with your accountant to work out what does that look like for me?

SPEAKER_01 8:29

Yes.

SPEAKER_00 8:30

And what is the average tax rate I'm going to be paying and how am I going to do that? Because there's also when you do salaries and wages, you're paying tax as you go, you're paying on your IAS or your business activity statement. Whereas if you're doing it through the drawings dividend environment, then you're potentially going to have a balance of tax to pay at the end of the year, or you're going to enter the page go instalment system where you're going to have to pre-pay your tax. Yep.

Franking Credits And Tax Myths

SPEAKER_01 8:52

Yeah. It it gets you everywhere. It really doesn't. There's no way out. And you think you can be sneaky, and you and as we always say, you are just kicking the can down the road. Absolutely, you are. And I guess when we say that you're paying tax in the company, I guess that leads to well, why do I have to pay tax in the company and then pay tax in my own name? Yeah. Um, and that leads to another conversation, I guess, around franking what's called a franking credit.

SPEAKER_00 9:25

Oh, good point.

SPEAKER_01 9:26

Yeah, you're not double taxed. No, and I think people do think that, well, that's not fair, I've already paid tax. Well, when we pay out a dividend um to you personally, it comes with what's called a franking credit, which is the tax you've already paid in the 25 cents. 25 cents in every dollar. And then you will pay, you get that as a credit against your tax payable in your own name, so that you only pay the difference between your marginal tax rate and that 25 cents. Less a gross up. There is a gross up, but you're not, it's not double tax. You're not being double taxed. You're not. You're getting a credit for what you've already paid.

Sponsor Break

Dividends Go To Shareholders

SPEAKER_00 10:04

Yep, absolutely. Now we're gonna just head off to a sponsor so people have time to settle into what we've just said, and we'll get back to you. Running a business without understanding numbers is a bit like colouring your own hair. It works out sometimes, but mostly you need someone who actually knows what they're doing. At All In, we're the proactive award-winning team getting all up in your business, from bookkeeping to accounting, tax, and big picture advisory. We don't just keep you out of trouble with the taxmanian devil, we help you grow. Real advice, real people, zero boring accounting vibes. Visit allinadvisory.com.au. Calculator. So we've talked about franking credits. The other thing about dividends is it goes to the shareholder of the company. Yes. And that can actually not potentially be you.

SPEAKER_01 10:56

We Yeah, uh again, this isn't it depends how you and your accountant have all these days.

SPEAKER_00 11:03

You if you've just done it yourself or if it's if it's an accountant done, it's usually best practice and you have to trust as the shareholder.

SPEAKER_01 11:10

But yeah, it is it who is the shareholder of the company because that isn't always the same as who the director of the company is. That's right. That's right. Um, they are the people legally that you can only pay the dividends to. You can't just pick and choose and and you can't change the percentages or anything.

SPEAKER_00 11:28

No, like if if they're shareholders, let's say it's 50-50 yourself and your partner, you must pay the dividend in those proportions, unless it's a different class of share. But let's not compliment.

SPEAKER_01 11:39

For the most part, every small mum and dad kind of company would not be set up like that.

SPEAKER_00 11:44

Yep. And so they wouldn't these days we usually see a trust. And what happens is the shareholder dividend gets paid out to the trust, and then from the trust, we then look at who is it best to give the dividend to. Normally that's the person with the lowest marginal tax rate because we work in a marginal tax rate system.

SPEAKER_02 12:00

Yes.

SPEAKER_00 12:01

As in it it scales depending upon how much income you earn. Yep. So that's important to understand too. And I mean, do we get into PSI at this point?

SPEAKER_01 12:11

Probably not, but there's a whole nother day of tax. Um, but yeah, I think it's really important because again, how we used to do it has changed. Um, and how you might have set it up when you were little and and it was just a little business, and and you like, oh, I don't need to worry about all that. It's too expensive to set up a trust. I'll just pop myself as the shareholder and away I go.

SPEAKER_00 12:36

It causes your pain.

SPEAKER_01 12:38

Um or you know, at the time you were single. And you've gotten married and you've had kids and things changed.

SPEAKER_00 12:45

And then when you change the shareholder, it becomes a siege, a capital gains tax event. Yeah, as then you're gonna pay tax.

SPEAKER_01 12:51

So it's it's not always as easy to unpick the structure.

SPEAKER_00 12:56

That decision is very important early on. It is definitely.

SPEAKER_01 12:59

And and if if your accountant has said, oh, it's gonna be an extra thousand dollars to set up a trust as and you're oh no, I can't afford that. That's a decision that you've just made.

SPEAKER_00 13:09

Yeah, because a thousand dollars of tax later when your business is successful means nothing.

SPEAKER_01 13:13

Yeah, um, so you do need to be careful. And the reason now we are setting all the the companies up generally with a trust shareholder is because um yeah, it gives that's where the flexibility of distribution and tax planning can come in. Because when you've just got individuals with 50% shareholding each, there is absolutely no choice but to give it 50-50, whether the other person wants it or not. And that's where it becomes tricky if you are not a husband and wife and you're in business with an independent with your business partner, yeah, and he wants the proper and you don't, yeah, that that don't that doesn't work, and that creates a bit of an issue.

Paying Partners And Family Fairly

SPEAKER_00 14:00

And that creates another point of if you are in with a business partner and you're you know you're not related entities, you need to actually really focus on that salaries and wages line and your remuneration to work out that if you are doing different things in the business and or putting different hours in or different value, that's how you remunerate yourself differently is through salaries and wages or director fees potentially. Yeah, not through the dividend shareholder.

SPEAKER_01 14:23

You you have to see it as two separate roles. Yes. As a shareholder, you're an investor. Yes. As a person that works in the business, you're a manager, uh like employee, effectively, or director. They're two separate things and should be remunerated separately because if I'm in business with someone that has invested, you know, have they put money in to help me start up, but I'm really the one doing all the work, I should be remunerated for the work that I'm doing, but then I get a reward at the end of a share of the profit, which is a different, yeah, a different reward. That's a that's how the investor, the shareholder, gets rewarded. That's like if I own shares in A and Z, I get a little bit of the profit at the end. I've done no work for it, but I've given them some money and they give me a share of return of their profit. And in the early days, what happens if you don't have the cash to pay them? Credit to a loan account, because you can draw it later. Yeah, so it is important to re um for that distinction of the different roles in a company.

SPEAKER_00 15:25

And this is also super important with family. If you've got big family in there and some children are working in the business and some people aren't, and this is something we get all the time in the big family estate planning matters, you have to remunerate the children that are working in the business for what they are doing. Yes. And if others are in the business as shareholders, they're just getting the end pie, right? They're not getting the bit that somebody has been working their bum off to get, and you know, oh hey, but they're just sitting and doing nothing and they're getting all the funds.

SPEAKER_01 15:54

And that might be um, you know, to the point of setting KPIs and giving performance bonuses because if they are creating value in the business, they should be rewarded for that. So that needs to come outside of being an investor as as well or in a shareholder. Because if I've really busted my butt and I've made I've grown that business from you know, one million to two million turnover or whatever, and um my siblings are getting rewarded for that, but I'm the one that's putting all the interesting. That's where we see most of the pain. Yeah. Um, I I think you need to sit and find other ways to reward. And and if it's not just salary and wages every week, it should be well, you know, bonuses hitting KPIs, you should be rewarded. And also bonuses are taxed.

SPEAKER_00 16:40

Heads up. Also, another another blog, which is one of our most listened to uh my most read, is we we talk through how to um tax a bonus, but pretty much it's salaries and wages. Like it's not there's no special tricks. Nah, there's not, and you can't just do it off the ball because you know, you might want to give them a little gift card potentially under$300 for fringe benefits tax purposes, but there's really not much these days that you can get away with.

SPEAKER_01 17:08

No. Um interestingly, we were actually having a discussion today around frequent flyer points.

SPEAKER_00 17:15

Oh don't and the fringe benefits tax on that.

SPEAKER_01 17:21

Because they even actually ethnically included. It's on the ATO's radar around taking um accumulating the points in the business and then transferring them to yourself is being flagged. So I don't know how that's a good thing.

SPEAKER_00 17:35

And look, there's value well, it's easy to track because you have points that you get told and then you see.

SPEAKER_01 17:40

I don't know if the ATO ever get told what it is, though.

SPEAKER_00 17:43

Well you'd if that's easy enough for them for for Quantas and Virgin to request.

SPEAKER_01 17:48

You know, that was always a benefit of a a little way to remunerate yourself in a company kind of thing is one of those things that never got tracked and sort of was a an additional perk. Yeah. The ATO have it on their radar. Yeah.

SPEAKER_00 18:02

And I don't think we're talking small amounts of points, but we're talking in the volume of maybe 300,000. Yes, same. So what I've heard. Yeah. So I think that that's something to flag because any, and let's think about it, anything you you're taking from the business that you haven't paid tax on is a benefit.

SPEAKER_02 18:18

Yeah.

SPEAKER_00 18:18

So you either pay it through salaries and wages or the dividend, or there's fringe benefits tax attached to that. And that includes cars. Yes. It includes gym memberships, it includes anything like that. If if entertainment, restaurant meals, and going to the football in a corporate box. And yeah, like although we feel like, oh, that's for business. The ATO has specific rules, guidelines, and there's legislation, the income tax legislation, that specifically prohibits us from saying that that is a business deductible expense. So it is something that you might see your accountant putting stuff to your loan account, you're like, no, that's the business. Well, they're doing it because they don't want to create a fringe benefits tax issue for you.

SPEAKER_01 18:58

Yeah. And I think we often get as well, oh, my accountant lets me deduct that. But what they don't realise is the accountant is moving it or just adding it back later. Yeah.

SPEAKER_00 19:07

So we either add back through the tax return, which is actually a fit, or we put it to your credit loan account. Yeah. Oh, sorry, you could deb your loan account, whether it be debit or credit 7A. Back to Dib 7A, it goes there. Yeah. Um, and that's where you're like, oh, but I did I've got this Div 7A debt, but I it's I haven't. I didn't take any cash.

SPEAKER_01 19:23

I didn't take any cash, but I did pay$100,000 worth of expenses with the business credit card.

SPEAKER_00 19:29

And this is another thing, and I think we'll put it in this category of um people don't understand what's going to their loan account. And you know, if you're making the mortgage repayment and you know, all of those school fees, yeah, all of those things, those are the things that are remuneration. Your boxtel. Yep. They are going to your loan account, and that's where Division 7A pops up. That's where everyone starts to get scared and worried. And everyone's got a diff different risk profile as to what level they feel comfortable with. Some people don't care, and some people are like, I don't want it.

SPEAKER_01 20:00

No. Even like, and I think we often get asked, well, show me everything that went through. Yeah. And and then you start adding it up. And it's like stuff like you went on a business trip, but you took the kids. Yeah. Well, the kids' flight and accommodation is deductible. So that'll be in your loan account. Just and it does add up over time.

SPEAKER_00 20:20

It really does. Um, and yeah. So when you think about seven years worth of those loans, um, it uh it adds up, and you've got to make repayments on that, you've got to get the interest.

SPEAKER_01 20:33

You're paying some off, but then you're adding more on.

Exiting A Company Costs Tax

SPEAKER_00 20:35

That's right, and you're only paying the minimum. So it's kind of like a home line, like once the interest goes on and you're making your principal repayment, not much is coming off the actual balance. So you're trading water, it's like those credit cards that never go anywhere. And this is the thing about a company, you can't just literally decide one day I'm gonna walk away. Like it's got retained earnings, it's got loan accounts usually. You actually need to pay those off over time. So there is going to be taxation events post you not trading.

SPEAKER_01 21:00

And the the company tends to hang around for many years after you've finished. Yeah. Because it does, it takes time to wind it back down unless you just really want to pay a lot of tax.

SPEAKER_00 21:13

Yep. And uh, because that you can do that in one year, but what you're gonna do is you're gonna get a massive dividend, you're gonna go into the highest tax bracket, you're gonna pay be paying half of it in tax. So it's not a nice experience for people to do that.

SPEAKER_01 21:27

Yeah, we have.

SPEAKER_00 21:27

They're like, I don't want it anymore, I don't want to know about it, I don't want to deal with this. Yep. I want to be free of it. And that goes back to the risk appetite of the person. Um, because it can be done, it's just gonna cost you a whole lot of tax. Yeah. So, Lee, is there anything else that we haven't covered today? Because that is twenty one minutes of pure tax gold that we have just laid down.

SPEAKER_01 21:47

No, yeah, I think that's that's kind of sums up the conversations we tend to have the most about dip seven A. Is I think it scares people probably and they get a little bit confused, but But once you really strip it back, it's just have I taken money from the company or paid private expenses from the company? Has tax been paid on it yet? Has tax been paid on it in my own name yet? If the answer is no, there's another little taxation event there. You're probably gonna want some. They like their little slice of the pie. Yep. And they've know every trick in the book because they've been around a very long time. And if you think through it, this is what I think when you strip it all back and you think through it, an employee can't get things for free. An employee can't get money without paying tax on it. So why should you, as when you operate through a company, it's just not fairly.

SPEAKER_00 22:41

Oh, stop making stop making sense.

SPEAKER_01 22:43

The tax system needs to be fair for all. And just because you run a business doesn't mean you should get to not pay tax.

Wrap And Listener Callouts

SPEAKER_00 22:49

And we can absolutely tell you you're not paying more tax than the person next to you. No, everyone pays this one. It is a fair system. That's how the system is designed. Awesome. Thanks so much, Lee. Um, we hope you've got what you need from this episode. There is also a blog that I'll put in the show notes. Thanks, everyone. Thanks. And that's a wrap on today's episode, everyone. Thanks for hanging out with us. We're very aware you could have been scrolling, snacking, or ignoring emails instead. So we appreciate you choosing us. If this episode gave you a light bulb moment, a laugh, or a quiet, oh wow, same, do us a favor and hit follow, leave a review and rate the podcast. It helps other brilliant people find us and makes the algorithm gods very happy. So share it with a mate, a bizbesti, or that friend who's building something big and pretending they're not stressed. Until next time, use bold moves, chase the big wins and lead the way.