How do company dividends work?

We are about to take over the family business. I'm trying to understand the accounting part.

Let's say you draw a salary of $80k. How can you get extra salary via the dividend and what's the pro/con of getting money this way?

Thanks

 

The company pays tax on its profit and maintains a franking account. When it pays dividends to shareholders it can pay them fully franked if it has enough franking credits. This will mean the recipient gets a credit for the tax the company has already paid.

 

1. Making a profit will help.

2. Unless you want to add additional capital to pay dividends from retained earnings.

3. If Point 2 then hopefully Point 1 will help pay back the addition of capital.

 

You can also draw from a company loan account. The loan account be positive or negative.

 

If you're just taking over I would suggest you get a good accountant, and have them explain the current structure to you, and ask about longer term structure options.

Is it just you? Siblings? Wife? Kids? Debts? Who are directors? Who are shareholders? What are your / their longer term goals? Are you considering asset protection or estate planning?

All of these might impact a decision on the best structure, and thus what you might do with salary / dividends, which could vary by structure.

My 2c.

 

As per @Terry_w
In addition, you can pay yourself less as an employee and "top up" your income with the dividend, this can save the business some costs (insurance/workcover premiums)
If you list your spouse as a shareholder it will enable you to pay them a dividend (income) even if they are a low income earner, and in turn less tax.
Note though that by paying yourself a dividend instead of wages that your superanuation will be less

 

If drawing from a company loan account and it ends up positive at year end just make sure you have a complying division 7a loan agreement and that minimum loan repayments have been made in accordance with division 7a

 

Be veeeeery careful of director loans not becoming deemed income or whatever the technical term is

 

The income tax effect of a dividend and a salary is the same. The same $100 of profit in a company will incur the same amount of tax in your hands when paid as a dividend or as a salary (when managed properly).

The benefit of a franked dividend is that it does not attract payroll tax and it does not attract superannuation guarantee levy.

If the business is generating business income (so it is not personal services income) the other benefit of a franked dividend is that the dividend can be allocated to various family members.

In some instances in a family business the equalisation of different family members outweighs the tax benefits.

Also consider other perks like car parking if your business has a lower turnover.

 

Division 7a dividend.

 

Most of my favourite eat in/ takeaway's fer years have only ever accepted cash.
No CC or EFTPOS.

Poor things.....must be struggling.....lol.

 

If I start a company and put say 200K as starting capital. I think I can safely draw that money from the coy without any tax consequences.

Should I overdraw, there should be no problem providing it is a complying loan.

This is my understanding. Not advice, check with a pro before doing something silly.

 

What do you mean by 'starting capital'? Is it a loan you lent to the company or the amount you paid for the shares?

 

It's money actually lent to the company. A private coy.

I haven't done this. Just tossing ideas in my head.

 

if it is a loan the company could simply pay it back.

 

Exactly.

 

That's a different proposition to the business loaning you money which is what you first posted

 

Not really.

 

Yes really, but I'm happy to agree to disagree

 

There is a huge difference.
With one the money would be taxable with the other no tax.

Just because a person somehow contributes something to a company doesn't mean they will automatically be able to pull it out tax free.

Same with paying company expenses.