Chartered Accountant Timothy Quinn leads Tax & Accounting at Lawpath. 16+ years in tax advisory, specialising in startup growth and expansion. Passionate about supporting entrepreneurial clients with early-stage investment incentives, restructuring, international exit strategy planning, and more.
- A profitable company doesn’t necessarily have its asset value available as spare cash.
- Before distributing profits, account for tax, GST/PAYG, creditors, working capital, and planned expenses.
- Retaining profits can help fund operations, investment, and cash reserves.
- Paying dividends can move company profits to shareholders, with franking credits potentially reflecting company tax already paid.
- Leaving money in a company doesn’t mean the shareholder can use it personally without tax or legal consequences.
- Informal withdrawals can create Division 7A issues.
- The right balance depends on both the company’s needs and the shareholder’s tax position.
Making a profit is a positive sign, but it doesn’t automatically mean the money is available to pay out. Before a company distributes cash to shareholders, it needs to consider whether it can afford the payment, what obligations are coming up, and whether retaining or reinvesting the money would better support the business.
Here’s a practical guide on things you should consider before cashing out company profits or paying dividends in Australia.
- Does company profit mean the cash is available to pay out?
- What should an accountant check before profits are paid out?
- Why would you leave profits in the company?
- Does leaving profit in the company save tax?
- Can you just leave profits in the company indefinitely?
- What happens when profits are paid as a dividend?
- Should the company pay down debt before paying dividends?
- What if the owner needs the money personally?
- What if the company keeps accumulating profits every year?
- Retain, reinvest, or distribute?
- What should you review before paying profits out?
- When should you get accounting or tax advice?
- FAQs
Does company profit mean the cash is available to pay out?
No. Company profit and cash available for distribution aren’t the same thing.
Accounting profit measures what the company earned over a period after expenses. Cash at bank shows the money currently held in the company’s account. Neither figure necessarily shows the cash the company can safely release.
A company may report a healthy profit while its cash is tied up in:
- Accounts receivable that customers haven’t yet paid
- Stock or inventory
- Prepaid expenses
- Capital purchases such as equipment, vehicles, or technology
Alternatively, the bank account may contain money already earmarked for:
- GST
- PAYG withholding
- Superannuation
- Income tax
- Creditors and supplier invoices
Profit tells you what the company earned. Cash flow tells you what it can actually afford to distribute.
What should an accountant check before profits are paid out?
Before recommending a dividend or other payment, an accountant should assess the company’s true cash position. The key question is: what cash can leave the company without creating a funding problem later?
Be sure to check:
- Actual cash balance
- Unpaid tax obligations
- GST and PAYG provisions
- Creditor balances
- Payroll and superannuation commitments
- Upcoming capital expenditure
- Debt repayments
- Customer payment cycles
- Inventory requirements
- Cash flow forecast
- Expected trading conditions
- Minimum operating buffer
This review helps distinguish profits on paper from cash that’s genuinely surplus.
Why would you leave profits in the company?
There are several legitimate commercial reasons to retain profits in a company in Australia. Retained profit gives the business internal funding capacity and can reduce the need to rely on external finance.
Common reasons include:
- Funding working capital
- Building a cash reserve
- Financing equipment or technology
- Hiring staff
- Supporting expansion
- Reducing reliance on external debt
- Preparing for seasonal downturns
- Funding acquisitions or product development
- Meeting expected tax liabilities
However, retaining cash indefinitely isn’t always optimal. Cash held in the company should have a purpose, whether that is supporting operations, funding growth, or providing a prudent buffer.
How much working capital should stay in the company?
There is no universal rule. The appropriate buffer depends on the company’s cost structure, payment cycles, and risk profile.
It’s best to model a weaker trading period than you’d normally expect. This helps identify how much cash the company may need if sales slow, customers pay late, or unexpected costs arise.
Should you reinvest company profits instead?
Reinvestment is a capital allocation choice. You can choose to strengthen the business by reinvesting company profits rather than distributing them or leaving them idle.
Possible uses include:
- Equipment
- People
- Software
- Marketing
- Inventory
- A new location
- Debt reduction
- Product development
The key question is whether the expected return from reinvesting the money exceeds that of distributing it or retaining it as cash.
Does leaving profit in the company save tax?
Leaving profit in a company can change the timing and level at which tax is paid, but it’s not the same as eliminating tax.
Company taxable income is taxed at the applicable company rate. For base-rate entities, that’s usually 25%, while the rest pay 30%.
If after-tax profits are later distributed as dividends, shareholders may face tax consequences. Their respective marginal tax rates, the company’s franking position, and the timing of the distribution can all affect the overall tax outcome.
Can you just leave profits in the company indefinitely?
You can retain profits to support the business, but owners should regularly reassess why the cash is being retained. Purposeful reserves are different from idle cash.
Questions to ask include:
- Is the cash required for working capital?
- Is there an investment plan?
- Is it supporting a cash buffer?
- Is debt unnecessarily expensive while cash sits idle?
- Is the company accumulating cash simply because there is no distribution strategy?
An accountant can help distinguish between cash retained for a clear commercial purpose and cash that is simply accumulating without a plan.
What happens when profits are paid as a dividend?
A company can distribute profits to shareholders through dividends when it satisfies the relevant legal requirements.
If company tax has already been paid, the dividend may carry franking credits, meaning shareholders receive a tax offset.
Paying yourself from a company follows a similar process, but salaries, dividends, and drawings all have different tax treatments.
How do franking credits affect the decision?
Franking credits reflect Australian company tax already paid on profits and can be attached to eligible dividends. They can affect the overall tax outcome for shareholders, but they don’t automatically make every dividend tax-neutral.
This depends on:
- The company’s franking account position
- Whether the dividend can be franked
- The shareholder’s tax position
- The timing of the distribution
Not all dividends are fully franked, and the company tax rate doesn’t always equal the shareholder’s final tax rate.
Should you pay a dividend just because the company has cash?
No. A healthy bank balance alone isn’t enough to justify a dividend.
Before paying a dividend, ask:
- What is due before the next major cash inflow?
- How much of the cash belongs to upcoming tax liabilities?
- What working capital does the company need?
- Are there debts or creditors about to fall due?
- Does the company have a sufficient buffer if revenue slows?
The dividend decision should be based on excess cash after foreseeable business needs, not simply on today’s bank balance.
Should the company pay down debt before paying dividends?
It depends. Debt repayment and dividends compete for the same cash, so the company should compare the benefits of each option.
Consider:
- Interest cost
- Loan covenants
- Repayment schedule
- Working capital requirements
- Liquidity after repayment
- The return expected from retaining or reinvesting cash
There is no universal rule that debt must always be repaid before dividends are paid. However, if a loan carries a high interest rate or restrictive covenants, reducing debt may be a higher priority than distributing cash.
What if the owner needs the money personally?
If an owner needs money from the company, there may be legitimate pathways, including:
- Salary
- Director fees
- Dividend
- Repayment of genuine money that the director previously lent to the company
Simply taking company cash for personal use can trigger different tax consequences. ATO guidance specifically warns that private company payments or loans to shareholders and associates can result in Division 7A deemed dividends where the rules are not satisfied.
What if the company keeps accumulating profits every year?
If a company continues to build profits year after year, it may be time for broader planning. This is particularly relevant if the company has substantial cash, investments, or a growing franking balance.
The review should consider:
- Accumulated retained earnings for the small business
- Cash and investments
- Franking account balance
- Shareholder income needs
- Succession plans
- Business investment plans
- Risk and asset protection considerations
- Future exit strategy
Asset protection and structuring issues can be complex, so company retention should not be treated as an asset-protection strategy without specific legal and tax advice.
Retain, reinvest, or distribute?
No single option is universally best. The right choice of whether to pay dividends, reinvest profits, or distribute the money depends on the company’s cash position, obligations, growth plans, and the shareholders’ circumstances.
| Option | Questions to ask |
|---|---|
| Retain cash | What buffer and working capital does the business need? |
| Reinvest | What commercial return is expected from the expenditure? |
| Pay down debt | What interest or cash-flow benefit does repayment create? |
| Pay dividend | Can the company afford the distribution, and what is the shareholder tax position? |
| Pay salary or fees | Is remuneration appropriate, and what PAYG and superannuation obligations arise? |
| Repay a director’s loan | Does the company genuinely owe the director money? |
Example: profitable company with $150,000 in cash
Consider a company with a bank balance of $150,000. At first glance, it may appear to have $150,000 available for distribution.
But suppose the company has:
- GST/PAYG due: $30,000
- Company tax provision: $25,000
- Supplier and payroll commitments: $35,000
- Planned equipment purchase: $20,000
- Desired operating buffer: $25,000
After accounting for these commitments, the company may have little or no genuinely distributable surplus.
Note that these figures are illustrative rather than a prescribed formula.
What should you review before paying profits out?
Before paying profits out, work through the following checklist:
- Confirm current profit.
- Reconcile the bank balance.
- Identify GST, PAYG, and tax provisions.
- Review outstanding creditors.
- Review the upcoming payroll and superannuation.
- Forecast cash flow for the next 6–12 months.
- Identify planned investment or capital expenditure.
- Review debt repayments.
- Determine an appropriate cash buffer.
- Review the franking position.
- Consider shareholder tax circumstances.
- Confirm the appropriate distribution or payment method.
- Document the decision correctly.
This process helps ensure the company distributes only what it can afford to release.
When should you get accounting or tax advice?
Professional advice is particularly important when:
- A large dividend is being considered.
- The company has substantial retained profits.
- Shareholders have different tax circumstances.
- Cash reserves include significant tax liabilities.
- There are director or shareholder loan balances.
- The company is deciding between reinvestment, debt repayment, and distributions.
- The company has multiple entities, a trust, or a shareholding structure.
- Profits are being retained primarily for tax reasons.
Company profit tax planning is equally as important as making arrangements for a rainy day. An accountant can help assess the company’s cash position, tax obligations, and distribution options before money leaves the business.
From basic accounting to complex tax compliance, Lawpath’s dedicated legal team can help. Get in touch with us today!
FAQs
Should I leave profits in my company or pay dividends?
It depends on the company’s cash needs, upcoming obligations, and the shareholders’ tax position. A company should distribute cash only after covering working capital, taxes, and planned expenditures.
Is it better to retain earnings or pay a dividend?
Neither option is automatically better. Retaining earnings can support operations and growth, while a dividend may suit a company with surplus cash and shareholders who need income.
Do you pay tax on profits left in a company?
Yes. Company profits are subject to company tax, whether or not they are distributed. Further tax consequences can arise when after-tax profits are later paid to shareholders.
Can a company keep profits instead of paying dividends?
Yes. A company can retain profits to fund working capital, investment, debt reduction, or cash reserves.
Can I take money out of retained earnings?
Not directly in the sense of simply withdrawing cash. Retained earnings are an accounting measure, whereas any payment to a shareholder or director must be made through an appropriate method, such as a dividend, salary, fee, or genuine loan repayment.
Are retained profits the same as cash in the bank?
No. Retained profits are accumulated accounting profits, while cash in the bank is the company’s actual liquid funds.
How much cash should a company keep before paying dividends?
There is no fixed amount. The appropriate buffer depends on payroll, fixed costs, debtor and supplier cycles, tax obligations, debt repayments, seasonality, and expected trading conditions.
Can I reinvest company profits instead of paying dividends?
Yes. Reinvesting profits can be appropriate when the expected commercial return exceeds the benefits of distributing the cash or holding it as a reserve.
Are dividends taxed twice in Australia?
Dividends can have tax consequences at both the company and shareholder level, but the franking system is designed to reduce double taxation when company tax has already been paid.
What are franking credits?
Franking credits represent Australian company tax already paid on profits distributed as eligible dividends.
Can I use company profits for personal expenses?
Not without following the correct process. Taking company money for personal use without an appropriate payment method can create tax consequences, including potential Division 7A issues.
Does Division 7A apply if I take money out of my company?
It can. Division 7A may apply where a private company provides payments, loans, or other benefits to shareholders or their associates and the relevant rules are not satisfied.
