The reason we establish and create a successful business from years of sweat and sleepless night is to improve our quality of life and to build future wealth. So, when your business becomes successful, cash is rolling in, and you have a healthy business bank balance, the next step would be to achieve your desired lifestyle funded by the fruits of your labour.
You will find a lot of advice out there, both expert and non-expert opinions. Even your gardener may add his 2 cents. However, the best advice is that of a professional accountant as we can look at your whole financial data and take into consideration any tax savings.
So, the golden question is, how do I withdraw money from my business under a company or trust structure?
Effectively there are three main ways to withdraw money from business:
1. Paying yourself a wage/salary like an employee– The process is exactly similar as you would have been working for someone else or as for your own employees. When you pay yourself wages, you will need to ensure PAYG is deducted at the correct rates and that superannuation is also accounted for.
The most important question to determine here is the annual salary to pay yourself. Here you will need to consider any tax benefits as well as your own personal situation, for example, how much you need to run your household, etc. It is a good idea first to speak with your accountant as they can help determine the best pay rate.
2. Dividend/Trust distribution – Depending on the structure, you can either issue a dividend or trust distribution at the end of the year. If you are running your business as:
a. Company- you can issue dividends to the shareholders of the company which is generally the owners of the business. With dividends the advantage is you can attach franking credits (that is the tax already paid by the company), so an income is not taxed twice. Another advantage is there are no super or PAYG requirements; however, the dividend becomes part of your assessable income as an individual.
b. Trust – if the trust makes a profit at the end of the year, generally, we accountants prefer to distribute the profit; otherwise, trusts are taxed at a higher marginal tax rate. Depending on what type of trust you created, the trust deed will decide the beneficiaries who are entitled to the profits. You still need to have a resolution at the end of June to determine the beneficiaries who are entitled to profit distribution. Again, the profit is taxed on the individual marginal rate.
3. Loan Repayment– When you initially started your business, you needed funds for working capital to cover the start up cost. Let’s be honest the banks do not favour small businesses with start up loans, so you as a small business owner must act as a bank for your business. When you provide personal funds to cover the business cost, it is treated like a loan. Meaning the business owes you money, and you can recover the money back (loan repayment) once the business can afford to pay back.
A Loan repayment is treated as tax free for both the owner and company/trust. There is a possibility like banks to charge the company/trust interest for lending your personal funds to the business. But then the interest income is taxable to the owner.
Whenever you think of implementing the above three strategies, it is wise to speak with your accountant. And if you don’t have one, we are available to explain all tax and accounting matters in simple English.