Self employed though company - pay salary or dividends

I wonder if someone can assist. I started my own business and operate through a company. I am looking to structure my income in the form of salary and dividends. I also don't need to take all the money out of the company as my wife earns enough to support us.

There are many things to consider with this but main one is, I am looking to purchase a property after the end of June 2018 tax year. This will give me 2 years of accounts, personal and business tax returns. ABN was registered a few years ago so will have 2 full years.

Does it matter to the banks if I pay myself a salary of all the net income out of the company, only $37,000 (to keep to lower tax bracket) and balance in dividends or simply leave the balance in the company i.e. no dividends.

I want to maximise the amount the banks will lend. Will they simply look at the net income of the company before salary and class this as my income or will they only look at what is actually paid to me? Thanks.

 

You need a finance broker for that one. @Jess Peletier, @Colin Rice, @tobe, @Brady or @Corey Batt should be able to help.

 

It doesn't impact the borrowing calculations. When we looking at determining income from a business - we look at the net profit before tax for the business - adding back any wages to the directors (if they're applicants), depreciation and a few other bits and pieces.

Lenders are very aware that in the end a business owner will direct their income the way which benefits them most.

 

The main thing to make life easiest for yourself is to make sure any income is declared in your tax return. Lenders can have issues when profits are retained in a company especially if they're not visible in a bank account or similar.

Speak to a broker with some rough numbers for your scenario and they'll be able to give you an idea on the servicing requirements.

 

I agree with Corey - it doesn't really matter from a lending point of view - but are you a shareholder?

 

Thanks, yes I am a shareholder and director.

It seems they will disregard the structure.

Do you mean as long as the income is declared in my or the company's tax return? If I don't declare all net income as dividends or pay it out as salary the balance will be in the company's tax return, not mine.

 

The bank will want to be sure the funds are available for use, so if you're retaining in the company and not distributing via dividends, having the retained funds visible sitting in a bank account is helpful - if they're nowhere to be seen, the bank will likely conclude that the business has spent them and won't be happy to include it as personal income.

 

Take care about the setup of your proposed business. If the income your business is generating is mainly from your own personal efforts then it is potential that the existence of the company, for tax purposes, will be disregarded.

Also: if you do create a wonderful business and you operate through a company you might lose the 50% capital gains tax discount when the business is sold. There are ways to overcome this but it should be considered and acknowledged.

Whoever is setting up the company is best placed to run through the pros and cons of different structures and consider income tax, capital gains tax, estate planning, asset protection and the ease of administration.

Ta.

 

I'm still learning when it comes to this type of stuff too, my business is coming up on a year old soon. Myself and 50/50 partner pay ourselves a decent salary and we'll see what the accountant says at end inf June as to whether to give ourselves a bonus or a dividend.

My understanding is though, that it doesn't really matter at the end of the day to your own net bottom line whether you take salary or dividends as it all comes out in the wash as the same net result after you do your personal tax returns anyway?

So in that case, we opted for a decent but sustainable salary so that my payslips show a good, regular income and any bonus/dividends and company profit is icing on top for serviceability calcs.

 

If the retained profits in the company are in a bank account therefore can be evidenced you should be fine. If their are multiple directors that dont include a spouse, banks will generally dismiss the funds for servicing but there are exceptions that will apportion the profit such as NAB.