Quick Summary

Taking money out of your company is to be expected - how else are you going to get paid? But how you do it matters.

• If you treat it like salary – it’s simple but you need payroll systems.

• If you treat it like a dividend -  you need profit, the correct share class, and formal declaration.

• If you treat it like a loan - you need an agreement, payment terms, interest and repayment schedules. You also need to be aware of the timeline.

Why this matters

Even if you own the company, your company’s money isn’t automatically your money.

Think of your company as a separate person with its own bank account. When you take money out of it, the ATO (that’s the Australian Taxation Office) wants to know why - is it:

• a wage or salary

• a dividend (profit distribution)

• a loan you’ll pay back later?

If you just transfer money out without recording what it’s for, the ATO will probably assume you’ve taken company profits for yourself - like paying yourself a bonus - and they’ll tax you on it.

A quick look at tax credits

Before we talk about how you pay yourself from a company, it helps to understand how tax credits work in Australia—especially franking system and Division 7A, which is a set of rules designed to stop company owners from taking money out of the business tax-free.

A company pays tax at the 25% corporate tax rate. But when those profits are later paid to you as a shareholder, they’re treated as dividends and taxed at your personal tax rate (which can be as high as 45% plus medicare levy 2%). This is where the franking system comes in.

What is the franking system?

Australia uses a system called imputation, which simply means this: the ATO doesn’t want company profits to be taxed twice—once in the company’s hands and again in yours.

So if a company has already paid tax on its profits, it can pass that tax on to shareholders as franking credits. When you receive a franked dividend, you also receive those credits, which you can use to reduce your own tax bill.

If you receive an unfranked dividend, it means the company hasn’t paid tax on that profit. In that case, you pay tax on the full amount at your personal marginal rate.

Why this matters

If you take money out of your company the wrong way, the ATO can treat it as a “deemed dividend” under Div7A rules. Typically they don’t come with franking credits - so they end up being fully taxable.

This means:

• The money you take from your company will be added to your personal income, and

• You may end up paying more tax than if it had been set up properly.

What are your main options for putting money in your pocket?

Below are the three common ways to take money out - with easy pros and cons.

Option 1 - Pay yourself a salary or wage (through payroll/STP)

Pros

• Straightforward: you’re treated like an employee.

• Tax is withheld and reported automatically via STP/BAS.

• Superannuation (SG) is handled as part of payroll.

• Great for stable, regular income.

• Wages and super paid are tax deductible to company income.

Cons

• You need STP-enabled payroll software.

• The company must withhold PAYG tax and pay super.

• Ongoing admin (or outsource to your accountant).

Best for when:

• you’re working in the business and want regular pay, or

• the company can manage ongoing payroll and super payments.

Option 2 - Declare a dividend (shareholder distribution)

Pros

• If the company has paid tax, dividends can carry franking credits to reduce your personal tax.

• Good for one-off profit distributions.

• Useful when your company has accumulated franking credits you want to use.

Cons

• You need distributable profits to pay dividends.

• You must treat all shareholders of the same share class equally.

• Requires documentation (dividend statements, minutes) and correct tax reporting.

• Dividend is a profit distribution and thus not tax deductible to company income.

Best for when:

• The company has clear profits and you want to share those profits with shareholders rather than create a loan.

• The company has unused franking credits and you want to avoid extra tax on money the company already paid tax on.

An example: you issued yourself $10,000 dividend

If the company already paid $2,500 tax on the profit, you receive a $10,000 dividend with a $2,500 franking credit. You declare $12,500 income but subtract the $2,500 credit from your personal tax bill - preventing double taxation.

⚠️Tax Warning!

Franking credit deficit

If the company gives out too many franking credits, it may need to pay extra tax to top up the franking account.

Franking credit trap

If the corporate tax rate falls (e.g., 27.5% → 25%), some credits from earlier years may become “stuck” because you can only frank dividends at the current lower rate.

Planning ahead helps avoid accidentally wasting credits.

To manage this, consider:

• Paying dividends earlier (before a rate drop takes effect) to use up higher-rate credits. 

• Also, review your personal tax position — if you’re on a lower marginal tax rate, you may receive a refund of franking credits. If your personal tax rate is high, you may prefer that the company retain profits until it can pay fully franked dividends at the higher rate OR until other strategies can unlock trapped credits.

• Looking ahead, it’s worth planning for future profits to make sure trapped credits can be used later and checking your company’s base rate entity status each year, as this affects the maximum franking rate you can apply. A base rate entity is generally a company with turnover under $50 million and where no more than 80% of its income is from passive sources such as rent, interest, or dividends.

You can find more information about franking credits on the ATO website.

Option 3 - Take money as a Division 7A loan (formal director loan)

This is when the company “lends” you money. It’s fine — as long as you follow the rules.

Pros

• Immediate cashflow without payroll and PAYG withholding.

• No immediate tax if the loan is compliant.

• You get extra time before the first minimum yearly repayment (MYR).

Cons

• Requires a written loan agreement by the company’s lodgment day.

• Needs minimum yearly repayments (principal + interest).

• Interest must be charged at/above the ATO benchmark rate (8.37% for 2025–26).

• If you break the rules, the loan becomes a deemed unfranked dividend — and fully taxable.

Best for when:

• You need cash now and the company (and you) are confident you can meet the repayment schedule.

• You want to avoid payroll and super in the short term but can commit to formalising the loan and making minimum yearly repayments.

• You are okay with more documentation / formal structure, and are comfortable with the idea of it being a loan (not a “free withdrawal”).

You can find more information about a complying Div7A loan on the ATO website.

An example: you withdraw $50,000

Imagine Save Money Pty Ltd lends its shareholder (Ben) $50,000 on 9  May 2022.

If Ben had simply transferred $50,000 from the company to himself without any documentation, loan agreement, or formal payroll/salary/dividend declaration and he has not repaid it back to the company, then:

The money would likely be treated by the Australian Taxation Office (ATO) as an unfranked deemed dividend.

Ben would include the $50,000 in his assessable income, with no franking credits, and could end up paying tax at his individual marginal rate 45% on that amount.

If the company doesn’t have a distributable surplus, this may limit the deemed dividend - but it’s still risky.

Now, compare that to the complying Div7A loan route:

Save Money Pty Ltd and Ben set up a Division 7A complying loan agreement before the company lodges its tax return for the year ended 30 June 2023. The loan follows the required rules: for example, it is unsecured, has a 7‑year term, and charges interest at the ATO benchmark rate.

Here’s what happens next:

Company side:

Each year, the company records the interest Ben pays as income.

That interest is taxed at the company’s rate.

Ben’s side:

Ben must make minimum yearly repayments (MYRs) — covering both principal and interest — by 30 June each year until the loan is fully repaid.

If all MYRs are made, the loan avoids being treated as a deemed dividend.

Whether Ben can deduct the interest depends on how he uses the money (usually deductible if used for income-producing purposes).

Must plan ahead because payments are due every 30 June while the loan is outstanding.

Ben can choose to repay the loan faster than 7 years if he wants.

Ben can make/offset the MYRs by declaring normal dividends with franking credits and wages to himself.

Ben gets the cash immediately but does not pay ‘tax’ on the loan itself right away. Tax is deferred until the company earns interest or if the loan is later converted into a dividend or salary.

*Exact repayments for later years cannot be finalised until the ATO publishes benchmark rates for those years.

⚠️Tax Warning! Section 109R — “Repay and redraw” trap

If you repay a loan just before 30 June but take the money out again straight after, the ATO can ignore the repayment and still treat the loan as unpaid. This can trigger a deemed dividend.

For example, Ben withdraws $50,000 from Save Money Pty Ltd and puts it in his personal home loan offset account to reduce interest throughout the year. Right before 30 June, he transfers the $50,000 back to the company to “repay” his Division 7A loan, only to withdraw the same amount again immediately after year-end.

At first glance, it looks like he made the repayment, but under Section 109R, the ATO can disregard this repayment because it was not a genuine repayment. The loan remains outstanding, and a deemed unfranked dividend may arise, creating an unexpected tax liability.

Tips for making a Division 7A loan complying

• Have a Written Loan Agreement: Include loan amount, interest rate (ATO benchmark or higher), terms.

• Make Minimum Yearly Repayments (MYRs): Pay principal + interest annually by 30 June. Missing payments can trigger a deemed dividend. Use the ATO Division 7A calculator to work out the correct MYR.

• Plan Ahead & Ensure Cashflow: Make sure you can meet repayments each year. Consider both your personal finances and the company’s needs to avoid surprises.

• Avoid Repay & Redraw Schemes: Don’t repay and immediately borrow the same funds again — the ATO can disregard this under Section 109R.

Check-list for year-end cleanup

As you approach the end of the financial year (30 June), go through this:

• What’s the outstanding director loan balance?

• Can you pay yourself a salary or bonus this year?

• Do you have enough profit to declare a dividend?

• Does your company have unused franking credits?

• Do all shareholders hold the same class of shares?

• If you’re doing a loan—do you have the written agreement in place and are the yearly repayments happening?

• Make a decision before the company lodges its tax return to avoid surprises.

Got questions? Reach out to us via app chat. You can also find more info about Div7A loan on this ATO website.

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