A lot of business owners believe one simple idea: pay yourself more wages, and you’ll pay less tax. It makes sense on the surface. Less profit in the company should mean a smaller tax bill, right?
But this is one of the most common tax myths we hear at Elite Plus Accounting. And it can lead to some costly decisions.
The truth is, tax planning isn’t about reducing the tax bill in one part of your business. It’s about looking at your whole financial picture, your company, yourself, and any trusts you run, and working out the best result across all of them together.
The Myth: "Extra Wages Will Save Me Tax"
Here’s the thinking many directors follow: take more wages out of the company before the financial year ends, and the company will owe less tax.
It sounds like a smart move. But it often isn’t.
What Actually Happens When You Take More Wages
Yes, extra wages lower your company’s profit, and that does lower the company’s tax bill. But that’s only half the story. When you pay yourself more, a few other things happen too:
- Your own personal taxable income goes up
- More PAYG withholding gets taken out
- You might get pushed into a higher tax bracket
- Your Medicare Levy could increase
- You may owe more in superannuation
- Your business has less cash left over for growth
So the tax hasn’t disappeared. It has just moved from the company to you personally.
A Simple Example
Let’s say your company makes a profit of $100,000 before you take any director wages. You decide to pay yourself an extra $50,000.
At first, this looks great:
- The company’s profit drops
- The company’s tax bill drops
But then look at what happens on your side:
- You now have an extra $50,000 counted as your personal income
- More tax gets withheld from your pay
- Your personal tax bill can jump up
- Your overall cash flow might actually get worse
When you add it all up, the total tax you save could be much smaller than you expected. In some cases, you might barely save anything at all.
Isn't a Tax Deduction Always a Good Thing?
Not really. Just because the company gets to claim a deduction doesn’t mean that money is free.
Every dollar paid out as wages works like this:
- The company claims it as a deduction
- You, the individual, have to declare it as income
So the real question isn’t whether the company gets a deduction. It’s this: which part of your business structure is paying the tax, and how much tax will it pay?
Looking only at the company’s numbers, without checking your personal tax position too, can lead you to make the wrong call.
What Real Tax Planning Looks Like
Good tax planning isn’t just about one number on one tax return. It looks at the full picture, including:
- Company tax: What your company owes after claiming wages, expenses, and other deductions. This is only one piece of the puzzle, not the whole picture.
- Personal tax: What you owe as an individual once wages, dividends, or trust income are added to your tax return. This can shift dramatically depending on how you’re paid.
- Trust distributions: If you run a trust, income can be spread among family members or beneficiaries, sometimes lowering the total tax paid across the group.
- Dividends and franking credits: Dividends paid from company profits often come with franking credits, which can reduce or offset the tax you personally pay on that income.
- Director loan accounts: Money you borrow from or lend to your company needs careful handling, or it can create unexpected tax bills or compliance issues down the track.
- Superannuation opportunities: Contributing to super can lower taxable income now while building long-term savings, often at a much lower tax rate than wages.
- Asset protection: The way you structure wages, dividends, and trusts can affect how well your personal and business assets are protected from risk or legal claims.
- Cash flow needs: Even the best tax strategy is useless if it leaves you short on cash. Your day-to-day running costs always need to be considered first.
- Future investment plans: If you’re planning to buy equipment, expand, or invest, keeping profit in the company might serve you better than taking it out now.
- Long-term goals for your business: Where you want your business to be in five or ten years should shape today’s decisions, not just this year’s tax bill.
No two businesses are the same. What works well for one business owner might be the wrong choice for someone else, even if their businesses look similar on paper.
The Right Question to Ask
Most business owners ask, “How do I pay less company tax?” That’s the wrong question. The better question is: “How do I legally pay less tax across my whole business, while keeping enough cash flow and setting myself up for long-term growth?”
Sometimes taking extra wages really is the smart move. Other times, dividends work out better. Sometimes trust distributions make more sense. And sometimes, leaving the profit inside the company is the best choice of all. There’s no single right answer. It depends on your full financial picture, not just one figure on one tax return.
Talk to Elite Plus Accounting Before You Decide
Before you increase your wages, take extra drawings, declare dividends, or make any tax move, it pays to check the full picture first, not just what it does to your company’s tax bill.
Getting this wrong can cost you thousands of dollars. Getting it right can save you thousands more.
Get in touch with the team at Elite Plus Accounting today, and let’s work out the smartest way to structure your pay, your business, and your future.
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