Your guide to paying yourself as a business owner in Australia

For most new business owners, it is their first foray into business, and they’ve generally come from being an employee. One of the key differences between being an employee and a business owner is the way in which you get paid. As an employee it’s all taken care of by your employer

Obviously paying yourself is an important part of your business. But there are right and wrong ways to do it and the wrong ways often come with some unintended tax consequences. In this article we’ll cover off on the options you’ve got to pay yourself and the key things to be aware of.

How you pay yourself is going to depend on the structure you operate your business through. Today, we’ll cover off on the three main options used by businesses in Australia:

As a sole trader you and the business are one in the same. There is no legal separation and for tax purposes the business is you and you are the business.

In this situation the money is yours so you can take it out of the business with no restrictions, you can spend it on personal expenses, or you can leave it in the business account. No matter what you do, you will still pay tax on the total income so as far as the cash goes, plan ahead for tax time.  

Because there is no legal separation between you and the business, the business can’t pay you as an employee. Instead, any money you take from the business is ‘drawings’ that has no tax withheld and no super payable.

Before you go spending all that hard earned money, keep in mind that you will have to pay tax on it so best to set some cash aside for the tax man. If you’re not sure how much tax you’re going to pay, you can jump onto .

It’s also worth considering whether you should be making contributions to your super fund to plan for your retirement. Because you’re not an employee this is no longer happening in the background, and you’ll need to actively contribute yourself. Reach out if you’re not sure how to do this.

A trust is a complicated structure to get your head around but basically a trust is just a relationship where a person or company (the trustee) operates a business for the benefit of you and your family (the beneficiaries).

At the end of the financial year, the trust distributes the profit to the beneficiaries however the trustee sees fit and the beneficiaries pay tax on their share of the profit. Because all the profit is ‘distributed’ to the beneficiaries (at least on paper), they are entitled to that money.

For example, let’s say at the end of the year you decide to distribute the $300k profit as follows:

Each of the above beneficiaries are entitled to their share of the profit so they can draw that money out of the trust in payment of the distribution. They’ll need to set some cash aside to pay the tax though and some more to make contributions to their super if that’s something they want to do.

In addition to taking cash out as a distribution, the trust can also pay anyone who works in the business as an employee. This works the same as any other unrelated employee the trust might have. The trust needs to withhold tax from the wages and pay this to the ATO in the BAS and also needs to pay super to your nominated fund. Just because you’re the business owner doesn’t mean you can avoid paying super so make sure that gets processed.

The easiest way for the trust to pay you as an employee is to use the payroll software built into your accounting package (i.e. Xero or QuickBooks). You should also think about annual and sick leave accruals. Basically, for payroll purposes just pretend you’re any other employee in the business.

As you can see, the company pays a lot less tax and that’s fundamentally the issue. What the government is saying is that you can’t treat the money as being yours (i.e. by spending it on personal expenses or transferring to your personal bank account) without treating it as your income and paying tax on it.

Most business owners think about the cash of their business as their own money and spend it accordingly. While this is true for a sole trader and, to an extent, a trust, this mindset of thinking about everything as being yours is dangerous for businesses that operate through a company.

A few people will be a bit confused at this point because after all, it is your business so why isn’t it your cash? Legally, and for tax purposes, a company is a separate entity from the owners. It’s basically treated as if it’s a separate person.

Here’s one way to think about it. Assume the company is a friend of yours who is out there operating a business and making money. If you had access to their bank account and started transferring yourself money or spending their cash on your personal expenses, they’re likely going to have some issues with this. And that’s probably fair enough, after all, why are you entitled to their money? You didn’t earn it!

That’s how you should think about your business. It’s the company’s money not yours.

How you pay yourself is ultimately going to depend on the business structure you operate your business through. Here is a quick summary of each:

The company can repay a loan it owes to you.

The company can pay anyone who works in the business as an employee.

The company can declare a dividend and pay this to the shareholders.