Are You Taking Too Much or Too Little Out of Your Business?

A lot of business owners I come into contact with don't have a remuneration strategy. Instead, they have a habit, and it looks like this:

Money comes in, expenses go out, and whatever's left is drawn down as needed.

Or, it’s left sitting in the business account because it feels safer there.

I understand it works in the sense that the bills get paid. But it's rarely the most tax-effective approach, and it leaves money doing less than it could.

If you've never sat down and deliberately decided how much to pay yourself, in what form, and when, this article is for you.

Does it really matter how you pay yourself?

The short answer is yes. The way you extract money from your business affects your personal tax position, your superannuation balance, your household cash flow, and the amount available to reinvest. It’s a package deal. These areas of your finances interact with each other, and a decision made in one area has consequences in the others.

Taking too little leaves you personally cash-poor while the business carries unnecessary retained earnings. This is often taxed at the company rate when it could have been distributed more efficiently. Taking too much in the wrong form can push your personal income into a higher tax bracket, trigger unexpected liabilities, or leave the business short of the working capital it needs.

Neither outcome is ideal, and both are avoidable with a bit of forward planning.

The main ways to pay yourself

How you extract money from your business depends on your business structure, but for most established owners operating through a company or trust, the options typically include some combination of the following.

Wages or director's fees

A salary paid to yourself as a director is deductible to the company and assessable as personal income. It also counts as income for superannuation purposes, which is important if building your super balance is part of your plan. A consistent wage provides a predictable personal income and simplifies your household budgeting. It’s also important if you ever want to take out a loan or restructure your finances. Your salary can be structured to take advantage of the tax-free threshold and lower marginal rates.

Dividends or trust distributions

Profits distributed from a company as dividends, or from a trust as distributions, are taxed in the hands of the recipient. In a company structure, franking credits attached to dividends can offset personal tax, depending on your marginal rate. In a trust, distributions can be directed to different beneficiaries. Recent legislative changes mean this is an area where current, specific advice is essential before any decisions are made.

Drawings

Taking money from the business informally, as drawings against a director's loan account, is common, but it requires careful management. A loan account in debit can create tax issues if it's not documented and managed correctly.

The right mix depends on your structure, personal tax position, household income needs, and business plans. There isn't a universal answer, but there is usually a better answer than the default.

Superannuation

Super can be a tax-effective way to extract value from a business, and it is consistently underused.

Concessional contributions, which include employer super and salary sacrifice, are taxed at 15% within the fund, a rate that for most business owners is significantly lower than their marginal tax rate. For an owner paying themselves a wage, ensuring super is being paid correctly and considering whether additional contributions make sense can reduce the overall tax position while building retirement savings.

The concessional contributions cap changes periodically, and as at writing, it is $32,500. If you've had years when contributions were below the cap and your super balance is under $500,000, carry forward rules may allow you to contribute more, another area worth exploring if it applies to your situation.

Should you reinvest or extract?

You want to aim to have three months of operating expenses in reserve. This is the gold standard and means that even if your business doesn’t earn a dollar, you’re able to cover your expenses for a quarter.

Money retained in the business is taxed at the company rate, currently 25% for base rate entities, though this can vary depending on your structure. That can be an effective holding rate if there is a purpose for retaining the funds. Retained earnings sitting idle in a company account aren't working as hard as they could be, either inside or outside the business.

The right remuneration strategy for you

A remuneration strategy that works for you considers the whole package: What do you need personally to run your household and meet your financial goals? What does the business need to operate, grow, and remain resilient?

The answers to these questions should be part of an ongoing conversation with your accountant. Not a set-and-forget discussion at tax time, but regular check-ins throughout the year that help ensure you know how much to pay yourself, in what form, and when so you can thrive at home and at work.

How we help

At Accounting Heart, we work with established business owners to build remuneration strategies that make sense for their business structure, household, and goals. If you've never had this conversation properly, or if it's been a while, we'd welcome the opportunity to work through it with you. Book a no-obligation discovery call.

Disclaimer: This is general information only and is not advice of any sort. No warranty or representation is provided by Accounting Heart Pty Ltd as to the accuracy, currency or completeness of the information contained in this blog. Readers of this blog should not act or refrain from acting in reliance upon any information contained herein and must always obtain appropriate taxation and/or other advice as may be appropriate having regard to their particular circumstances.