If you pay yourself the wrong way as a company director, you could trigger unexpected tax bills, ATO scrutiny, or even a Division 7A deemed dividend.
As a successful business owner, you’re no stranger to complex and confusing decisions. But one of the most important ones — how you pay yourself — can quickly become a dangerous territory without clear guidance from an accountant or business advisor.
At VLL Partners, our chartered accountants in Sydney work closely with directors to ensure they can confidently balance personal income, business cash flow, and tax obligations.
Let’s walk through the four main ways company directors can pay themselves and explain how Division 7A plays a pivotal role. Whether you’re based locally in the North Sydney area or elsewhere in Australia, knowing the right strategy can help you build wealth and avoid costly missteps.
As a company director, you have four viable choices.
Best for: Directors who are operationally involved and prefer regular cash flow.
If you’re actively involved in the day-to-day operations of your company, paying yourself a salary is a straightforward option. As with any employee, your company will be responsible for PAYG withholding and superannuation contributions.
While a salary is clean and compliant, keep in mind:
Draw too much, and you risk tax headaches or tight cash flow. Draw too little, and your family or future investment plans may suffer. We’ll help you avoid the common traps that catch out directors.
If You’re Not on Payroll
Not all directors are employees. If you serve on the board but don’t have an employment contract, you may be paid director’s fees instead of a salary.
Director’s fees can cover:
These payments must be authorised in the company constitution or by shareholder resolution. While superannuation may still apply depending on the arrangement, it’s less clear-cut than with a salary, and compliance with tax obligations can be more complex.
Tip: Always document entitlements properly and keep supporting receipts to protect against audit risk.
Best for: Wealth distribution to shareholders in a tax-effective way, especially when cash flow is strong.
Dividends allow you to share in the company’s after-tax profits. You must own shares that carry dividend rights, and the company must have sufficient distributable surplus.
Franking credits can make this option highly tax-effective.
For example, if the company pays tax at 25% (the base rate for many SMEs), you may receive a credit that reduces your personal tax on the dividend.
However:
Important: Your company must remain solvent after paying dividends, or you risk breaching directors’ duties.
Division 7A Territory
Best for: Short-term funding needs or realising value without immediate taxes, if the rules are strictly followed.
Borrowing from your private company is perfectly legal, but you must tread carefully.
Division 7A stops shareholders from accessing company profits tax-free through loans or other benefits.
If your company lends you money and it’s not repaid or documented adequately before the Australian Taxation Office (ATO)’s deadline (usually the lodgment day), it may be treated as an unfranked dividend and taxed accordingly.
To avoid this:
If you missed a payment, the ATO can treat the unpaid amount as a dividend, which could result in an unexpected tax bill.
Director loans are a legitimate strategy when managed correctly with your accountant.
Update for FY26: The Division 7A benchmark interest rate has dropped from 8.77% to 8.37%. This lower rate reduces your minimum repayment obligation on complying loans. It’s a good time to review your loan agreement, recalculate repayments, and consider your options.
Receiving payments incorrectly can affect your compliance, cash flow, and tax planning.
A Division 7A loan slip-up can lead to:
Directors should always:
1. Seek professional advice
A trusted business tax accountant can determine the best remuneration strategy based on your company’s position, your income needs, and your long-term goals.
2. Keep accurate records
Detailed and up-to-date records, such as a compliant loan agreement, director’s fee resolution, and dividend statement, are essential for ATO compliance.
3. Stay informed
Tax laws evolve; the Division 7A benchmark interest rate, superannuation thresholds, and income tax brackets are subject to changes. A proactive business advisory accountant can keep you compliant.
Paying yourself correctly builds your wealth while protecting your business and keeping you on the ATO’s good side.
In this article, we’ve unpacked the options available to company directors and how Division 7A governs loans. By understanding the rules and seeking the right advice, you can avoid costly tax errors and maximise your financial outcomes.
At VLL Partners, our chartered accountants and business tax advisors combine over 40 years of experience with personalised services to help Sydney’s entrepreneurs make informed decisions that protect and grow their wealth.
Seeking guidance on how to pay yourself the right way? Let’s chat about how to align your director remuneration with your broader tax and estate planning strategy.
