As a business owner running your business through a Company structure, one of the big decisions you’ll need to make is how to pay yourself. There are two primary options: taking a wage or paying yourself through dividends. Both have their advantages and disadvantages, and the choice you make can have significant implications on your personal tax, company tax, and cash flow management. Let’s explore the pros and cons of each option to help you make an informed decision.

Dividends: Pros and Cons

Dividends are distributions of company profits to shareholders. If you’re a shareholder in your company, dividends can be an efficient way to extract profits. Here are the benefits and drawbacks:

Pros of Dividends

1. No Superannuation, Workers Insurance, or Payroll Tax
   One of the main advantages of paying yourself through dividends is that dividends don’t attract superannuation obligations, workers insurance, or payroll tax. This can lead to significant savings, especially if you’re looking to reduce ongoing business expenses related to staffing and employee entitlements that relate to the owners.
2. Tax Minimisation Through Family Trusts
   If your company’s shares are owned by a family trust, paying a dividend can offer strategic tax minimisation. By paying dividends to the trust, you can allocate income to other family members within the trust, potentially reducing your groups overall tax liability.This strategy does need to be managed carefully since there are tax rules that may limit the flexibility in certain circumstances.

Cons of Dividends

1. Complexity and Compliance
   Paying dividends comes with some added complexity. For one, your company needs to have sufficient franking credits available to attach to the dividends. Franking credits represent tax already paid by the company, which reduces the amount of tax you need to pay on dividends. Additionally, dividends can only be paid out of profits, meaning if your company hasn’t generated a profit, you won’t be able to issue dividends.
2. Trust Structures and Added Costs
   To take advantage of the tax minimisation strategies involving a family trust, you’ll need to set up and maintain the trust, which adds cost and complexity. Trusts come with their own compliance obligations, such as filing trust tax returns and managing distributions.
3. Tax Management
   Unlike wages, where tax is withheld and paid to the ATO on your behalf throughout the year, dividends require you to manage your own tax obligations. You’ll need to be prepared to pay tax on the dividends you receive, while taking the franking credits into account. This is a calculation that can be quite complex.
4. Multiple Shareholders
   If your company has multiple shareholders, paying dividends can get complicated. Dividends must be paid proportionally to each shareholder according to their shareholding, so you may not have the flexibility to pay dividends to just yourself if others are involved.

Wages: Pros and Cons

Paying yourself a wage is the more traditional approach and often comes with fewer complexities than dividends but potentially more cost. Here’s what you should consider:

Pros of Wages

1. Simplicity and Consistency
   Wages offer a clear and straightforward payment structure. The company withholds tax on your behalf and pays it to the ATO through the Pay As You Go (PAYG) system. This means you don’t need to worry about large tax bills later in the year because tax is being accounted for throughout the year.

Cons of Wages

1. Extra Administrative Costs
   Paying yourself through wages comes with additional administrative and accounting requirements. You’ll need to comply with Single Touch Payroll (STP), which means reporting your wage payments to the ATO each time you pay yourself. This attracts additional admin and software costs, especially if you need help from a bookkeeper or accountant.
2. Superannuation and Payroll Tax
   Unlike dividends, wages are subject to superannuation obligations, workers’ compensation insurance, and payroll tax (if applicable in your state). These additional costs can add up and may not be ideal if you’re trying to maximise your personal take-home pay or keep business expenses low.

Which Option Is Right for You?

When choosing between paying yourself a wage or a dividend, there are several factors to consider:

• Tax Efficiency:
  If you plan to pay out profits anyway and can leverage a family trust structure, dividends may provide more tax efficiency. However, if simplicity and regular cash flow are your priorities, wages may be the better route.
• More Cash:
  If wages are starting to get high which could potentially increase your payroll related costs, paying dividends could result in the Company having more cash in its pockets.
  
• Company Profits:
  You can only pay dividends if your company is profitable. If the business is still growing and not generating profits, wages may be the only option.
• Simplicity:
  If you’re new to a Company structure haven’t hadmuch experience with it, sometimes it’s best to keep it simple and go with the wage option.

Conclusion: Tailoring Your Pay Structure

Both wages and dividends have their advantages and disadvantages, and the best option depends on your specific circumstances, including the profitability of your company, your tax strategy, and your cash flow needs. It’s worth considering a hybrid approach—taking a wage for regular income and paying yourself dividends when the company generates surplus profits.

We hope you’re enjoying our blog, just a note though. The information provided here is intended for general informational and educational purposes only. While we aim for accuracy, we can’t guarantee that this content will apply to your specific situation—every business owner’s circumstances are unique.

This blog is not a substitute for personalized advice from a qualified accountant, tax advisor, or any other professional. If you have questions specific to your individual circumstances, we strongly recommend consulting a professional for tailored advice.