How do I pay myself as a company director in Australia?

Deciding how to extract money from your own company is one of the most significant tax planning decisions for an Australian business owner. There are several methods available, each with distinct tax, superannuation, and administrative implications.

Method 1: Salary or wages

You can employ yourself as an employee of your company and pay yourself a regular salary. This is the most straightforward method.

The company deducts the salary as a business expense (reducing its taxable income). You must: - Register the company as a PAYG withholder - Withhold tax from your salary at the applicable individual rate - Remit the withheld tax to the ATO via your BAS - Pay superannuation contributions of 11.5% of your ordinary time earnings (2024-25 rate) to your super fund - Report salary payments through Single Touch Payroll (STP) from the first payment

Single Touch Payroll (STP) is a mandatory ATO reporting system where your payroll software reports wages, tax withheld, and superannuation information to the ATO in real time at each pay event.

Method 2: Director's fees

Director's fees are distinct from wages, though they are taxed similarly. They are paid for performing director duties rather than employee duties. Director's fees are deductible to the company, included in your personal income tax return, subject to PAYG withholding, and subject to superannuation (from 1 July 2022, all director's fees are subject to the 11.5% super guarantee).

Method 3: Dividends

If the company has sufficient after-tax profits (retained earnings), it can declare a dividend. Dividends are paid to shareholders, not specifically to directors, so this method applies when you own shares in your company.

Dividends are not deductible to the company (they are paid from after-tax profits). They are typically franked — meaning they carry franking credits representing the company tax already paid. When you receive a franked dividend: - Include the cash dividend plus the franking credit in your personal tax return - Your tax is calculated on the grossed-up amount - You receive a credit for the franking amount

For a base rate entity paying 25% company tax, a $75,000 cash dividend would carry a $25,000 franking credit (a $100,000 grossed-up dividend). If your marginal rate is 32.5%, you pay approximately $32,500 tax but receive a $25,000 credit, resulting in only $7,500 additional personal tax.

Why the combination strategy is common

Most owner-directors use both salary and dividends strategically: - Pay yourself a salary up to around the 19% personal tax bracket to maximise deductibility to the company while keeping personal tax moderate. - Top up with dividends using retained profits at the lower personal marginal rates. - Set salary at a level that triggers superannuation guarantees, building your retirement balance on a concessionally-taxed basis, and take dividends for additional income.

Superannuation considerations

Super guarantee applies to salaries and directors' fees but not to dividends. This means: - Paying yourself only via dividends avoids compulsory super contributions - Paying via salary builds your super fund balance (important for long-term retirement planning) - You can make additional voluntary concessional contributions up to $30,000 per year (2024-25), which are taxed at 15% rather than your marginal rate

Division 7A: what NOT to do

If you take money from the company without a proper salary/dividend structure — for example, by spending company funds on personal expenses or taking informal loans — you risk Division 7A treatment by the ATO, which deems these amounts to be unfranked dividends taxable at your marginal rate, without the benefit of franking credits.

Personal Services Income (PSI) rules

If more than 50% of your company's income is derived from your personal effort or skills (rather than from a business structure, equipment, or employees), the Personal Services Income rules may apply. PSI rules restrict the ability to split income with associates, claim certain deductions, and retain profits in the company.