How to Extract Money from Your Australian Company

How to remove money from a company tax effectively

Withdrawing wealth from your proprietary limited company is difficult. Australian tax law, particularly the tortious Division 7A rules, is designed to keep wealth ‘trapped’ inside the corporate structure.

Your company is a separate legal person. The company’s money is not your money. Taking cash without a documented strategy is a breach of your duties as a director and an open invitation for an audit from the Australian Taxation Office (ATO).

A single mistake triggers severe tax penalties. This guide outlines the primary methods for extracting wealth from a company.

Method 1: Pay Director Fees and Wages

Directors are automatically ’employees’ of the company. Therefore, the company can pay you a salary, wage, or director’s fee for services rendered.

As an employer, the company deducts Pay As You Go (PAYG) tax and pays mandatory superannuation. The company claims a tax deduction for this expense. This may be one off or a regular income stream.

The Tax Risk of Unreasonable Director Fees

A common misconception is that directors’ fees can be unlimited. This is incorrect. For an expense to be deductible, section 8-1 of the Income Tax Assessment Act 1997 (Cth) requires it to be “incurred in gaining or producing assessable income”.

For example, paying a $300,000 director’s fee to your wife who performs no duties fails this test. (This is shocking for asset protection as well.) The ATO rules that this payment is not a genuine expense but a disguised distribution of profit.

The ATO’s Anti-Avoidance Weapon: Part IVA and Director fees

The ATO also attacks these arrangements using the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (Cth).

Part IVA allows the ATO to cancel any ‘tax benefit’ obtained from a ‘scheme’. Paying a non-commercial salary to a non-working spouse is a classic scheme. The ATO cancels the company’s deduction and assesses the income in the hands of the person who truly earned it.

The “Unpaid Director Fee” Trap (TA 2011/4)

The ATO specifically targets a sham arrangement described in Taxpayer Alert TA 2011/4.

The Trap:

1. A company passes a resolution on 29 June to pay a $100,000 director’s fee.
2. The company claims a $100,000 tax deduction for that year.
3. The company never pays the fee. It is left as an “accrual” in the books.
4. The director, unpaid, does not report the $100,000 as income.

The ATO views this as a sham. It denies the company’s $100,000 deduction, arguing the expense was not ‘incurred’. This leads to a massive back-tax bill for the company.

Action	Genuine Service (s 8-1 Compliant)	Sham Payment (Non-Working Spouse)	Unpaid “Accrued” Fee (TA 2011/4)
Payment	$80,000 salary for genuine marketing work.	$200,000 “director fee” for no duties.	$100,000 “director fee” accrued, not paid.
Company Tax	Company claims $80,000 tax deduction.	ATO denies $200,000 deduction.	ATO denies $100,000 deduction.
ATO Attack	None. Legitimate deduction.	Section 8-1 (not genuine). Part IVA (scheme).	Sham arrangement. Section 8-1 (not ‘incurred’).
Penalty	$0	Company back-tax + ATO penalties + GIC.	Company back-tax + ATO penalties + GIC.

 

Method 2: Distribute Profits via Franked Dividends

When the director receives a director’s fee, it does not benefit from the lower tax rate available through a tax imputation credit. Only shareholders getting dividends can access these wonderful tax imputation credits.

How Franked Dividends Stop Double Tax

Companies pay tax on their profits. For many trading businesses (with under $50 million turnover and low passive income), this rate is 25%.

When the company distributes this after-tax profit as a dividend, it ‘franks’ it. This attaches a ‘franking credit’ for the tax the company already paid. This system stops the same profit from being taxed twice. This franking credit is used by shareholders when they receive dividends to reduce the tax they pay. If your income tax rate is low enough, you actually get money back from the ATO.

Franked Dividend Calculation Example

Your company, ‘Smith Pty Ltd’, earns $100,000 in profit.

1. It pays company tax at the 25% rate: $25,000.
2. This leaves $75,000 in retained profits.
3. Smith Pty Ltd pays this $75,000 to you as a fully franked dividend.
4. You receive a dividend statement showing:
   • Cash Dividend Paid: $75,000
   • Franking Credit: $25,000
5. In your personal tax return, you declare the “grossed-up” amount: $75,000 + $25,000 = $100,000.
6. Assume your personal marginal tax rate is 47% (including Medicare). Your tax on the $100,000 is $47,000.
7. You use the $25,000 franking credit to offset this tax bill.
8. Your final “top-up” tax payable is: $47,000 – $25,000 = $22,000.

The Corporate Law Catastrophe: Section 254T

Paying a dividend is not a simple accounting entry. It is a strict legal act governed by the Corporations Act 2001 (Cth).

Section 254T provides a three-part test. A company must not pay a dividend unless:

1. the company’s assets exceed its liabilities, and the excess is sufficient for the payment; and
2. the payment is fair and reasonable to the company’s shareholders; and
3. the payment does not materially prejudice the company’s ability to pay its creditors.

The Insolvent Trading Nightmare (s 588G)

Breaching section 254T of the Corporations Act 2001 is a catastrophe. “Materially prejudice” means you cannot pay your suppliers, the ATO, or your rent after you pay yourself the dividend.

If paying that dividend causes the company to become insolvent, the directors are personally liable for insolvent trading under section 588G of the Corporations Act 2001. A liquidator sues the directors to repay the full amount of the dividend personally.

Real Life Horror Story: The Dick Smith Collapse

The case of DSHE Holdings (Receivers and Managers Appointed) v Abboud NSWSC 673 is a stark warning.

• The Act: Dick Smith’s directors approved millions in dividends.
• The Problem: The company was funding operations with supplier money. The directors relied on “profit” figures based on “hopeful” supplier rebates, not actual cash flow.
• The Breach: The receivers argued the directors breached their duties. The dividend payments did materially prejudice the company’s ability to pay its creditors (the s 254T test).
• The Outcome: The executive directors were held personally liable for the entire amount of the dividend paid, resulting in millions of dollars in costs.
• The Lesson: Profit on a spreadsheet does not equate to solvency.

Method 3: Extract Cash for Non-Shareholders via a Service Trust

Dividends are a “closed loop”. You can only pay a dividend to a shareholder. Your 18-year-old child is “swanning about” at university, wasting their low tax rates. The child does not own shares in the company. Therefore, they cannot access imputation credits. The child cannot get dividends as they are not shareholders.

The child is also not a director of the company, so the child cannot just get a director’s salary. (Being a director is high risk, as the director goes down with the company if the company ever fails. So, from an asset-protection perspective, you do not want to harm your child by making them a director. Same for the woman of substance.)

In contrast, a Service Trust Agreement allows the company to pay money (albeit unfranked income) to non-shareholders and non-directors.

The company enters into a service trust agreement with your Family Trust. The Family Trust provides services to the company. The Family Trust receives payments for those services.

Once the income is in the Family Trust, the “shareholder” restriction no longer applies. The Trustee distributes that cash to any beneficiary of the family trust. You distribute income to the adult child at university. You use up their tax-free and low tax thresholds.

Forget the “Imputation Credit” Obsession

Do not always wait for a franked dividend. The mum and dad shareholders are often already on their highest marginal tax rates. A Service Trust payment is a tax deduction for the company. You move “pre-tax” value and “post-tax” wealth out of the corporate environment into the hands of family members on low tax rates.

Method 4: Company lending you money via Division 7A Loans

Mum and Dad can “borrow” money from their company. However, this is the single most dangerous area of tax law for company owners.

The company lending to related parties is governed by the strict rules in Division 7A of Part III of the Income Tax Assessment Act 1936 (Cth).

The ATO Myth: “My Company’s Money is My Money”

The ATO debunks this myth in every desktop audit. A  company is a separate legal entity. Treating its bank account like your personal wallet triggers Division 7A.

Division 7A is an anti-avoidance rule. It stops private company owners from accessing profits tax-free through “payments, non-Div7A loans, and forgiven debts“.

You escape the danger through a unique type of loan agreement. It is called a Div 7A Loan Deed. But it should be put in place well before your company may lend any money to you, your wife, children or trusts.

Family Court orders that your company hand over money to your spouse

A Family Court order (under the Family Law Act 1975) orders your company to transfer a $500,000 asset to your ex-spouse. This is common in property settlements.

This transfer is a ‘payment’ from the company to an ‘associate’ (your ex-spouse). This triggers Division 7A.

The result is a financial disaster. The Family Court often believes that all its orders are stamp duty, CGT and income tax free. That is not the case when it comes to taking money out of a company.

Your ex-spouse receives the $500,000 asset, and the ATO issues them a deemed unfranked dividend assessment for $500,000. This results in a $235,000 tax bill, destroying the entire settlement. The case of Pavlic & Pavlic (No 2) [2023] FedCFamC1A 97 highlights this danger.

 

Method 5: Claim Director Expense Reimbursements

This is a simple and non-taxable extraction. The company reimburses you for business-related expenses you paid for personally. This includes travel, office supplies, or vehicle costs.

This repayment is tax-free. It is a reimbursement, not income. The company claims a tax deduction for this reimbursement under section 8-1 of the ITAA 1997.

The Fringe Benefits Tax (FBT) Trap

This method is only for legitimate business expenses. If the company pays for or reimburses your private expenses (e.g., your home mortgage, holidays, or school fees), this triggers the Fringe Benefits Tax Assessment Act 1986 (Cth).

FBT is a separate, punitive tax paid by the company. It is levied at the highest marginal tax rate (47%) on the ‘grossed-up’ value of the benefit.

FBT Calculation: The Company Car

A company car is the most common fringe benefit. Keeping a logbook is critical.

FBT on a $40,000 Car	Calculation	FBT Payable by Company
1. Statutory Formula(No Logbook)	The law assumes a flat 20% private use.Taxable Value: $40,000 * 20% = $8,000	$8,000 (Value) * 2.0802 (Gross-Up) * 47% (Rate)= $7,819.55
2. Operating Cost Method(With Logbook)	FBT is paid on the actual private use percentage. Logbook shows 10% private use. Total running costs are $15,000.Taxable Value: $15,000 * 10% (Private Use) = $1,500	$1,500 (Value) * 2.0802 (Gross-Up) * 47% (Rate)= $1,466.17
Outcome		Keeping a logbook saves the company $6,353.38 in FBT.

 

Method 6: Recover Startup Capital (Loan to Company)

This method applies if you previously lent money to your company. For example, you provided $50,000 in startup capital. This is a “Director’s Loan (Credit)” on the company’s balance sheet.

The company repays this $50,000 principal to you. This repayment is not income. It is a tax-free return of your own capital.

The Legal Danger: ‘Debt’ vs. ‘Equity’

The greatest risk is a lack of documentation. If you have no formal loan agreement, the ATO challenges the arrangement. This is the “Debt vs. Equity” trap, governed by Division 974 of the ITAA 1997.

The ATO argues your $50,000 advance was not a ‘loan’ (debt) but a capital injection (equity). An undocumented, interest-free, “at-call” loan from a related party is a key indicator of equity.

If the ATO succeeds, it re-characterises the $50,000 ‘repayment’ as a disguised unfranked dividend. This triggers a massive personal tax bill.

In a liquidation, an undocumented loan makes you an ‘unsecured creditor’. You are last in line and recover nothing.

This disaster is avoided with a Legal Consolidated Loan Agreement to a Company built at the time you advanced the money. This document is the legal evidence that proves the transaction was a genuine debt.