Thinking about taking money out of your company? It’s not as simple as transferring funds into your personal account.
There are several ways to withdraw money, each with its own tax and compliance rules. Understanding the differences — and the risks — can help you avoid unexpected bills and stay on the right side of the ATO.
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Taking Money from Your Company: What You Need to Know
One of the biggest problems we see is when business owners take money from their company without understanding the tax or compliance implications. Whether it’s a salary, dividend, or loan, each method has rules — and missteps can lead to unexpected tax bills.
Below are the three most common ways to withdraw funds from your company and the key things you need to know.
1. Pay Yourself a Salary
The most straightforward way to access company funds is to pay yourself a salary or wage. As with any PAYG employee, you’ll need to pay tax on that income, separate from what the company pays in tax. However, the company can claim the salary (and superannuation) as a deduction.
Superannuation is also required and must be paid on time to remain deductible. Paying yourself a salary ensures simplicity and compliance, but you’ll need to consider the business’s cash flow and profit position before determining your income level.
2. Dividends
Dividends allow business owners to extract profits from the company, but only when the company is profitable. Dividends can be:
Franked Dividends
These are paid from profits that have already been taxed at the company level. A franking credit is passed on to shareholders to offset their personal tax bill.
Unfranked Dividends
These don’t include a franking credit, which means the full tax burden falls to the shareholder.
While dividends can be tax-effective, they aren’t always available — particularly in early-stage businesses or if past years have resulted in losses. If you’re unsure, speak with your accountant before making any payments.
3. Loans and Division 7A
The most complex method of withdrawing funds is taking a loan from your company. This comes under Division 7A of the Income Tax Assessment Act and must be handled carefully to avoid being treated as an unfranked dividend.
Loan Structure
If a shareholder or associate takes money from the company and it’s not classified as a wage or dividend, it must be set up as a loan. These loans must be repaid over a maximum of 7 years (or 25 years if secured against property) and meet strict documentation requirements.
Interest Rates and Terms
Loans must meet minimum interest rates and repayment terms as set by the ATO. For example, in 2023–24, the Division 7A benchmark interest rate is 8.24%. These repayments are mandatory and can’t be deferred indefinitely.
Documentation Risks
If the loan agreement or repayment terms aren’t documented correctly, the ATO may deem the entire amount to be a dividend. This could result in additional tax obligations, including penalties and interest.
QBCC Considerations
For those in the construction industry, Division 7A loans usually don’t count as tangible assets under QBCC rules — unless strict conditions are met. This can affect your ability to maintain your licence if you rely on these funds.
Common Misconceptions About Company Loans
Repaying at Year-End and Redrawing
Some business owners believe they can repay the loan at the end of the year, then withdraw the money again shortly after. The ATO has flagged this under Section 109R — such repayments won’t be recognised unless they’re genuine and not designed to get around Division 7A rules.
Interest and Deductions
If the borrowed funds aren’t used for income-producing purposes (like investing), the interest paid may not be deductible. Worse still, the company may need to declare interest income without the director being able to claim a corresponding deduction — increasing the overall tax burden.
Final Advice
Withdrawing money from your company can be done properly — but only if you follow the right process. Division 7A loans, in particular, carry serious tax risks if mismanaged. Always work with your accountant to ensure you have the correct documentation and understand your obligations.
Thinking about taking money out of your company? Reach out to JVP Advisory today for tailored advice on salaries, dividends, and Division 7A loans.
