Dividends v wages – a new ball game

We often recommend to our small and medium sized business clients with largish retained profits to cease paying wages and to pay dividends instead.

To pick some round numbers, a $7,000 net salary will require say $3,000 of tax to be paid thereon AND WorkCover AND may be Pay-roll Tax as well.  Of course, there is also 9.5% SG super but that is not a bad thing.  So the cost of getting $7,000 into a working shareholder’s hands is often close to or even exceeds $12,000.

This is a costly way of remunerating oneself when a company has large retained profits.  In Victoria, there is no WorkCover or Pay-roll Tax on dividends.  And as a franked dividend is using the credits from tax already paid, the cost of getting $7,000 into a shareholder’s name is just $7,000.

It is important to note though that whilst the company can save up to $5,000 in immediate cash flow by paying a dividend instead of a wage, the company will have a greater profit in the current year as it has less deductible wages.  It will therefore pay more income tax in arrears.  For someone approaching retirement this can lead to other tax and cash flow advantages.

In the 2015 Federal Budget, it was not only announced that the Company tax rate will fall to 28.5% but that the dividend franking credits would remain at 30%.  So in my example above, you can add another $150 saving to receiving dividends over wages.

So what’s best for you?  Ask us.

At MRS, we will spend today planning for your success tomorrow.

At MRS, we will spend today planning for your success.