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Company directors: don’t make this crucial tax mistake

Most of us have experienced being a company employee and many Australians have experience as a company owner in a small way.  If you’re a shareholder in a widely held company like Telstra or perhaps a major bank then technically you’re a part-owner of the company.

Being an employee and being an owner are two very different things.

An employee gets their fortnightly wage in exchange for their contribution to the workings of the company and is involved on a day to day basis.

An owner (or shareholder) has no involvement with the running of the company and gets one or two dividends per year depending on the company’s profit.

But in most small businesses the distinction isn’t that clear: the owner is also an employee.  The two roles get morphed together into one.

But from a tax point of view, you need to keep the distinction between owner and employee.  If you don’t, you create some negative tax outcomes and difficulties for your business.

Save thousands by salary packaging in your small business

Let’s take a profitable small business with one director who is also the shareholder.

The company makes a profit of $200,000 and pays $150,000 of this to the director as a wage.  Add super to that and the total remuneration is $164,250.

  All wages Packaged salary
  Amount Personal tax payable Amount Personal tax payable
Wages $150,000 $46,132 $90,000 $22,732
Superannuation ^ $14,250 $2,138 $25,000 $3,750
Fringe benefits $0 $0 $5,500
Employee FBT contribution $0 ($7,000)
Dividend ! $0 $0 $34,500 $5,472
Total take home pay plus net super $115,980 $116,046
Total cost of employment # $172,463 $153,750
Total cost of employment after tax * $127,294 $122,538
Company savings  $      4,756.00
Personal tax savings  $    16,316.00

^ Superannuation contributions tax rate is 15%

! Assumes a fully franked dividend

# Assumes 4.85% payroll tax and 0.15% workcover contribution.

* Small business tax rate 27.5% – applies if your turnover is under $10 million.

A better salary package means that the same amount of total pay can be achieved for less cost to the company and a personal tax saving of over $10,000.

The difference can be even better if:

  • the salary packaged car is set up as an associate lease;
  • the dividends are distributed to a lower tax beneficiary through a discretionary trust;
  • (on lower incomes) the owner is eligible for family tax benefits.

Some of these terms might be new concepts to you and might not fully make sense.  Don’t worry – they make sense to us and they result in less of your hard-earned business profit leaking out as tax and more money in your pocket.

We are here to help

We help small and medium-sized businesses get more rewards for their hard work and more time for life.

We do this by helping our clients achieve less tax with less admin work.

We provide convenient tax and accounting services, give helpful advice and can even run your in-house accounting function including bookkeeping and payroll. For more recommendations and advice from our knowledgeable team, get in touch to book an appointment today.

Disclaimer: This article uses a hypothetical example that may not apply to your situation.  It is not intended to be personal tax advice and should not be treated that way.  If you need advice on your own situation please get in touch and we can discuss being appointed as your accountant and tax adviser.

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