As a company director, your business is important and you invest countless hours and boundless energy into making it thrive. But when it comes to rewarding yourself for all that hard work, things can get a bit tricky and there’s one question that keeps popping up—how do you pay yourself from your company?
In this article we’ll take you through the steps of paying yourself as a sole company director or when multiple directors exist in a company in Australia, so that you can make informed decisions.
Let’s dive right in!
How do I pay myself from my company?
As a dedicated company director, understanding how to pay yourself is a pivotal aspect of your entrepreneurial journey. Let’s look at the various options when it comes to withdrawing your well-deserved earnings from your company.
Pay yourself through director’s salary
Paying yourself through a director’s salary is a common and straightforward method for remuneration. As a company director, you can receive a regular salary, just like any other employee. To set up your director’s salary:
- Determine a Reasonable Salary: Start by deciding on a reasonable salary that reflects the value of your role and responsibilities within the company. Consider industry standards and the financial health of your business.
- Register for PAYG Withholding: Ensure your company is registered for Pay As You Go (PAYG) withholding with the Australian Taxation Office (ATO). This enables you to withhold the required income tax from your salary.
- Payroll Obligations: As a director-employee, you must meet payroll obligations, including making regular tax deductions from your salary and reporting to the ATO. Complying with these responsibilities is crucial to avoid penalties.
- Superannuation Contributions: As a director paying yourself a salary, you are also entitled to receive superannuation contributions. Remember to make regular super contributions on your behalf to ensure a secure retirement.
- Keep Records: Maintain accurate records of your salary payments, tax withholdings, and super contributions. This documentation is essential for financial reporting and compliance purposes.
- Review and Adjust: Regularly review your director’s salary to ensure it aligns with your company’s performance, profitability, and market conditions. Adjust as needed to stay competitive and sustainable.
Remember, paying yourself a director’s salary establishes a clear distinction between your personal finances and those of your business. By following these steps, you can confidently pay yourself a fair wage while complying with the relevant taxation and employment regulations.
Always consult with a financial advisor or accountant for personalized advice that suits your specific circumstances.
Through Company Constitution
Paying yourself through a company constitution in Australia involves setting out specific provisions within the company’s governing document that outline how and when directors can receive remuneration. Below are a few steps to consider when using this method:
- Review the Company Constitution: Start by carefully examining your company’s constitution. This legal document lays out the rules and regulations that govern the company’s internal operations, including the process for director remuneration.
- Determine Director Remuneration Policy: Work with the board of directors and stakeholders to develop a clear and fair director remuneration policy. This policy should cover the basis for remuneration, such as fixed salary, bonuses, or other benefits. Section 202A of the Corporations Act 2001 (Cth) governs the remuneration of directors. Hence, it is important to be across this piece of legislation. Keep in mind that section 202A(1) is a replaceable rule and can be altered within your Constitution
- Seek Legal Advice: Since the company constitution is a legally binding document, it’s essential to seek legal advice to ensure that any proposed amendments comply with the Corporations Act 2001 and other relevant laws. If you need assistance with your company constitution and the remuneration of directors, speak to a company lawyer.
Apart from the above methods, you can also propose to amend the constitution that reflect the agreed-upon director remuneration policy.
This may require a special resolution and approval by the shareholders. If the resolution is passed, you should convene a general meeting of shareholders and seek their approval for the changes to the company constitution.
Pay a Director’s Fees
This is one of the most common ways company directors receive their pay. But before you seek this method, review the following:
- Determine the Director’s Fee: Begin by deciding on a reasonable director’s fee based on the time, effort, and expertise you contribute to the company. Consider factors like the size of the company, industry standards, and your responsibilities as a director.
- Review the Company’s Financial Position: Ensure that the company’s financial health allows for the payment of director’s fees without compromising its stability and growth prospects.
- Document the Director’s Fee Agreement: Create a formal agreement that outlines the terms of the director’s fee, including the amount, frequency of payment, and any other specific arrangements.
- Director’s Fee Approval: Present the director’s fee agreement to the board of directors for approval. If you are the sole director, this step may not be necessary, but it’s essential to maintain formal records.
Directors fees are subject to superannuation at the normal rate on ordinary time earnings of the director. Another important point to consider is the procedural requirements for director’s fees. For example, company directors cannot receive pay if they are acting trustee for a trust. This is only possible if you pass a resolution at a general meeting.
Through Company Dividends
Dividends are a portion of your company’s profits paid to shareholders in return for their investment. If you are a shareholder of your company, you are eligible to be paid dividends. However, there are important points to consider when deciding whether you would like to be paid in dividends.
Before you proceed, remember to follow the following steps:
- Declare Dividends: As a director, you play a role in declaring dividends. Discuss with the board of directors and other shareholders the amount of dividends to be paid and the appropriate timing for distribution.
- Dividend Payment Options: Decide whether you want to receive your dividends as cash or reinvest them by purchasing additional shares. This decision will depend on your personal financial goals and the company’s growth strategy.
- Dividend Imputation: Understand the concept of dividend imputation in Australia. Imputation credits allow shareholders to offset part or all of their tax liability on dividends, as the company may have already paid tax on the profits from which the dividends are distributed.
Remember, dividends are typically subject to individual tax rates, but imputation credits can reduce the overall tax payable.
Your company must pay tax on profits; then the Director will receive either a franking credit for the tax paid to the director for their share of the dividend. The ATO will refund the difference if your personal tax total (as a Director) is less than your company’s tax total.
However, something that you should keep in mind is the potential tax problems that dividends can create. If your company becomes insolvent, you may have to repay the dividends taken. If you need more information about tax obligations on your dividends, speak to a taxation lawyer.
Pay yourself through Stock Options
Another way to pay yourself is through stock options. This method aligns your interests with the company’s long-term performance and shareholder value. However, in order to get paid through this option, a stock option plan and the process is already laid out.
In other words, there should be set rules around the number of stock options that can be granted to each director and the vesting schedule, which indicates when the options can be exercised (i.e., converted into shares).
Conclusion
The method you choose for remuneration can have a significant impact on your personal financial well-being and the overall success of your venture. Whether through a director’s salary, dividends, stock options, or any other method, it is essential to strike the right balance between your individual needs and the financial health of the company.
As an empowered entrepreneur, taking the time to understand the legal, tax, and financial implications of each payment method is vital.
If you have any other questions or require assistance, speak to a company lawyer from Lawpath, who will help you navigate this challenging situation and provide you with the right solutions.
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