You have been working hard on turning a spark of idea into a functioning business. Like other entrepreneurs you are very proud of it like a parent being proud of his/her child. Behind all these years and months, you know how much you have been putting into it without getting paid. Now you are running out of your cash in personal bank account seeing your business bank account has accumulated some money. “Surely I deserve to be paid” you are thinking. But how much? How often? Is it wages, director’s fee or dividend? How much extra tax will it be, bla bla bla…
It sounds easy at start but soon when you are trying to work it out you are confused. It is common. But to explain, it is not simple. You need to consider the followings,
- Have you previously lent your own money to the business? If so, it is possible that you can draw it back from the business bank account with no tax implications. It is the money that business borrowed from you and now returns back to you. It is not your wages to be taxed.
- What’s your other income like? If you take wages, are you going to have advantage or disadvantage? If your total taxable income is less than $18,200, you don’t pay any income tax. It is worth considering even if you can draw back your loan tax free from the above point.
- What come with wages are superannuation, WorkCover insurance, employee entitlements, other employment cost and administration/reporting cost. It is always more than just the wages itself. At least you need to buffer for this extra.
- What’s the average historical profit of the business? What does the forecast look like? It is the bottom line for the extra cost mentioned in the point 3. This answers that “how much” question. Sometimes it is ok or even better to be paid more than the profit provided you consult with your accountant.
- Dividend is another way to be paid. It is paid to the shareholders. If it is a trust structure, it is a distribution instead. They are working very differently from wages which you need to consult your accountant for a much further explanation.
All of the above require you to have the most up to date accounting record before making the right decision. Recklessly draw money out of your business can attract undesirable result, such as a division 7 issue. If we can be there to assist you for this scenario, you can always reach out to send me an email (email@example.com) at any time.