Extracting Profit from Your Company: What You Need to Know
If you own a company, one key question is: How do I get the profits out of the business? Whether you’re the director, shareholder, or both, understanding your options for extracting profit is essential for effective cash flow management, tax planning, and business growth.
This blog outlines the main methods for taking money from a company, how to decide what you can pay, and why retaining sufficient working capital is important.
Common Ways to Extract Profit from a Company
1. Wages or Salaries
Paying yourself a salary as an employee or director is a straightforward and reliable way to take money out of the company while contributing to your personal income and superannuation.
Key points:
Salaries are deductible expenses for the company, which can reduce taxable profits.
You’ll make regular personal contributions to superannuation as part of this process.
Setting a reasonable salary that reflects your role helps ensure compliance and supports consistent cash flow.
2. Contractor or Consulting Fees
If you provide services through a separate entity (like a personal services company or trust), the company can pay contractor or consulting fees for your work.
Key points:
Contractor arrangements allow flexibility in how you structure your income and business activities.
The contractor entity manages its own tax and superannuation obligations, providing some administrative separation.
It’s important that these arrangements are genuine commercial relationships aligned with ATO guidelines.
3. Dividends
As a shareholder, you can receive dividends paid out of the company’s profits after tax.
Key points:
Dividends are paid from profits after tax and are not tax deductible to the company.
Franked dividends carry franking credits, which can be used by shareholders to offset their own tax liabilities.
When the shareholder is a trust, dividends can be streamed, meaning the company can allocate dividend income to different beneficiaries of the trust according to the trust deed or resolution. This allows flexibility in how income is distributed without attributing the payment to a specific individual directly.
Dividends must only be paid if the company has sufficient profits (retained earnings).
4. Director or Shareholder Loans (Division 7A Loans)
A company can lend money to directors or shareholders under what’s known as Division 7A of the tax law. This arrangement provides a flexible way to manage cash extraction over time.
Key points:
Division 7A loans allow you to access company funds without immediately triggering a taxable dividend, provided the loan meets certain criteria (such as having a formal loan agreement, set interest rate, and fixed term).
The loan must be repaid according to the agreed schedule to avoid adverse tax consequences.
Interest charged on these loans is typically at a benchmark rate set by the ATO and, in some cases, may be tax deductible for the company if the loan is used for income-producing purposes.
This structure offers flexibility to spread cash withdrawals over time rather than taking a lump sum all at once.
Proper management of Division 7A loans can be a valuable tool in your overall strategy to extract profits efficiently and tax-effectively.
How to Work Out How Much You Can Pay
The amount you can extract depends on:
Company Profits: Only profits after tax and expenses are available for dividends. Dividends can’t be paid from capital or losses.
Working Capital Needs: The company needs enough cash to cover day-to-day expenses, upcoming bills, payroll, and future growth plans.
Tax Considerations: Balancing salary and dividends can help manage your personal and company tax outcomes.
Cash Flow Timing: Sometimes profits are on paper only (e.g., unpaid invoices), so cash availability is critical.
Why Retain Working Capital?
Working capital is the money the company needs to operate smoothly. Retaining sufficient working capital helps the company:
Pay suppliers and staff on time.
Cover unexpected expenses or downturns.
Fund future investment and growth opportunities.
Avoid cash flow crises that can threaten the business.
A common rule of thumb is to keep at least 3–6 months of operating expenses in cash reserves, but this varies by industry and business size.
Putting It All Together
Extracting profit is about balancing your personal income needs with the health and sustainability of your business.
Paying yourself a reasonable salary ensures stable income and super contributions.
Dividends allow sharing in company profits but require sufficient retained earnings. When the shareholder is a trust, dividend streaming offers additional flexibility.
Division 7A loans offer flexible cash access over time, with formal terms to avoid tax pitfalls.
Retaining working capital safeguards your company’s ongoing operations.
Final Thoughts
If you’re unsure about the best way to extract profit from your company, or how much you can safely pay yourself, talk to your accountant or financial advisor. They can help you develop a strategy that fits your business’s financial position and your personal goals.
Disclaimer: This blog provides general information only and is not financial or tax advice. Please consult a professional advisor for guidance tailored to your situation.