Home – New Forums Starting your journey Paying myself wages under a Pty Ltd structure Reply To: Paying myself wages under a Pty Ltd structure

  • Total posts: 13

Thanks for the reply & comments – they are greatly appreciated.

Since my last posting, I’ve been doing a bit more research and you’re right about the sole trader structure. You are just drawing on your own net profits which are already subject to tax on an individual entity basis. So it makes no difference to tax. You have every right to withdraw your profits from the bank at any time without taxation consequence.

With a company it’s different. The company is a separate legal entity to your own individual entity even if you are a shareholder/director/owner of it. A company is like a fake person. You can be an employee of a company (because it’s a separate entity to you) but you cannot be an employee of yourself (as a sole trader or partner in a partnership structure).

If you are personally paid any money (or withdraw) from company funds then it generally has to be in the form of wages/salary which is subject to PAYG withholding (just like when you work for someone else as an employee, because the company is not you) or as a franked dividend (being a distribution of profits which the company has already paid tax on, entitling you to an imputation/franking tax credit). The company is entitled to claim an expense against income for PAYG wages/salary paid to you, but not for distribution of profits (dividends).

If you just go willy-nilly personally withdrawing money from the company bank account without accounting for it under PAYG or the franking account then it gets very messy. Unless you have a legitimate documented loan agreement, the payments to you are deemed to be unfranked dividends which are neither deductible against company income nor carrying tax credits to you like franked dividends do. Not good… and a total nightmare for your accountant to avoid ATO audit. Never ever take money out of the company bank account without accounting for it properly!

If you’re operating under a company structure then you need to have a very good understanding of Division 7A of the Income Tax Assessment Act.

I’ve still got a bit of time up my sleeve before we officially go live, so I’ll keep doing my research and may just perhaps run as a sole trader in the initial stages until the cash flow works up to be enough for us to expand into these complicated waters, but I do thank you again greatly for your time to respond.