Taking Money Out Of A Company Vs A Trust
In terms of taking money out of a company versus a trust, the first way to take money out of a company is through a salary.
Take a salary out to pay yourself, or to your spouse if they work in the business. But you still have to take Pay As You Go withholding because it’s a requirement, and you have to pay super, which is currently 10% at the moment. It went up from 9.5% from 30 June to 1st of July and it just changed over a couple of months ago to 10%.
The second way to take money out of a company is to loan it out of the company.
Division 7A is the rules that surround loans from companies.
Take a salary out to pay yourself, or to your spouse if they work in the business. But you still have to take Pay As You Go withholding because it’s a requirement, and you have to pay super, which is currently 10% at the moment. It went up from 9.5% from 30 June to 1st of July and it just changed over a couple of months ago to 10%.
The second way to take money out of a company is to loan it out of the company. Division 7A is the rules that surround loans from companies.
The third option is to pay dividends.
Dividends are paid to the shareholders of the company. So when you set up a company, you need to be conscious of who owns the physical shares in that company, because they will be receiving the dividends from it and be taxed on that.
If you are setting up your structure, you will need a trust to own those shares. The whole idea of a trust owning the shares is, you can choose who gets the dividend at the end of the day.
Dividend is a payment of prior year profits. So, ordinarily you will earn a profit, and if you earn $100,000 in profit, you will pay 26% tax. So you are left with $74,000 in after tax profit in the company and you can pay out a franked dividend after you’ve paid that tax that is usually the next financial year.
In terms of taking money out of a trust, the first way to do so is also to pay a salary. If you have a trust structure as your business structure, you may not be taking a salary, which is completely normal.
You can take a loan out from a trust and we call it ‘Drawings’ and there are no requirements for it. Division 7A in summary, says you have to repay the money from a company, and you can’t just endlessly rip it out. You have to repay it with interest, minimum repayments and a maximum term. But there’s no requirement to pay that money back to a trust because loans from trust don’t have those requirements.
A trust pays a distribution every single financial year. If a trust makes $100,000 in profit, you need to distribute that in that financial year and it hasn’t been taxed yet, so it will give its profit to family members including you, your spouse, kids, parents, and retired parents. There is a whole list of people we can consider, or it can give it to other entities in the family group.
Keep in mind that different client groups, different situations have different structures in place. On a global level, neither is better than the other, but it depends on your family situation, which one of these options is more appropriate for you.
Watch the full webinar, ‘Solving Company Loads Division/7A Problems ’ at https://learning.benwalker.com/courses/solvingcompanyloansD7AP
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