How a person receives income from a business depends on how they own the business. When a business is owned as a sole trader they receive the income in the form of net business profits. Because a person cannot employ themselves they cannot receive a wage from their own business.
When a business is owned through a family discretionary trust or a company the owners can either receive income in the form of profits distributed to them each year, or they can pay themselves a wage. In this latter situation the wages decrease the profit distributed.
If a family discretionary trust is used the profit is received as trust distributions, while if a company is used the profit is received as dividend distributions.
Q. I have been in business for about five years and am set up as a company. So far I am not paying myself any wages as I am still making losses. Business has been really good over the past eight months and I will hopefully be making profits soon.Â
As I want to leave my fulltime job in late 2018Â I'm thinking of paying myself a minimum wage, even if it's just $100 per month to get used to the process. I also want to see how much I can afford to pay myself when I am employed by the business. How do I go about commencing a wage from my business?
A. If you pay yourself a wage from your business this will result in an increased loss for the company. This loss must be accumulated to be offset against future profits made. It will not make sense paying yourself a wage now, as this will result in you paying tax on the wages while the company is not paying tax.
The first step in the process of commencing a wage from your company is to register it for Pay-As-You-Go withholding tax with the ATO. You will in addition need to register your company for WorkCover insurance, and register it with a super fund that will receive the compulsory employer superannuation contributions.
Working out how much you can afford to pay yourself, once the business is making a profit, will depend on a number of factors. While the profit is building for your business the amount you pay yourself will depend on the excess cash produced by the business.
As a general rule you should not pay yourself a wage that results in creating or increasing a tax loss for the business. Taking into account the tax free threshold and the low income tax offset, and you have ceased working as an employee for someone else and don't have any other income, you could take a wage of approximately $20,000 a year and not pay any income tax.
Because of the tax and administration complexities surrounding commencing a wage with your company you should seek professional advice before taking any action.
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