I own a Pty Ltd company - How much should I pay myself?

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2020 will no doubt go down in history as one of the weirdest, wackiest years in modern history, some Australian business owners have packed up shop, others have barely scraped by and some have flourished.

Out of the flames of 2020 have emerged stimulus and tax changes, shaped by the pandemic, which will impact businesses well into the future.

2021FY has seen the ATO slash individual tax rates which will naturally alter the way profits are distributed from company's to their shareholders and trusts to their beneficiaries.

I own a Pty Ltd company, how much should I pay myself?

When considering how much to pay yourself there are multiple aspects that should be considered:

The goals of the company - Is the plan to grow and sell? if so a high percentage profits should be retained in the business and used for marketing, capital purchases and hiring.

Minimum viable wage - consider the least amount of money needed to support your lifestyle, family and earnings from a banks perspective if you are seeking finance for a home or car.

Tax implications - With the corporate rate for most companies being 26% and the tax rate for individuals reaching as high as 45% for the 2021FY there is a tipping point when profits are better left taxed in the company and retained as working capital.

Wage recommendation considering tax implications

The corporate tax rates for most Small & Medium sized entities (SME's) who have turnover less than $50m is 26% this means that every dollar of net profit accrues a 26c tax liability.

The Individual tax rates in Australia for 2021FY are:

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CTK Accounting has done the number crunching for you.

Less tax will be paid on wages up to $113,000. Wages higher than this number will be taxed more in the hands of the individual than they would being retained in the company.

The $113,000 will also attract superannuation so for cash flow purposes don't forget that you will also owe yourself another 9.5% due to your super fund each quarter. However the Superannuation will be favorably taxed at 15% in your personal super fund and is wholly tax deductible to your company.

The above calculation considers individual tax rates and the Medicare levy of 2% but I have left out the possible implications of payroll tax and tax offsets which may apply in certain circumstances.

Summary

If you own an Australian proprietary limited (Pty Ltd) company and your stuck on how much to pay yourself even after considering the goals of your company, and the needs of your lifestyle, settle on a number around the $113,000 mark, you'll at least get favorable taxation on that money for the 2021FY.

Need help with payroll or Taxes for your business? Contact CTK Accounting

Wollongong based tax accountants and bookkeepers.

Visit Tax Nuggets Academy for a wide range of tax explainer videos on topics such as Division 7A and discretionary trusts.

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