Director's Dividends, or another way?

[pulpfriction]

Hi all. I'm the sole director of my Company and I'm looking at ways to take money out of the Company (from it's profits) for my personal use, without putting myself into a higher tax bracket through increased wages. Any thoughts appreciated.

[YVB]

Just remember that you would need to declare all personal income (no matter the source) and that's what your tax bracket is based on.

[v2Media]

Fully franked dividends. You pay no income tax for fully franked dividends. "Fully franked" basically means the company has already paid income tax. Income that is retained by the company at the end of the financial year is liable for tax at the company tax rate. When the company pays that tax, it becomes a 'credit' with the ATO. The company uses that 'credit' to fully frank dividends paid to shareholders. Once the credit runs out, no more fully franked dividends.

An accountant may be able to explain it more clearly, but that's my understanding of how it all works.

[Salmin]

Fully franked dividends. You pay no income tax for fully franked dividends. "Fully franked" basically means the company has already paid income tax. Income that is retained by the company at the end of the financial year is liable for tax at the company tax rate. When the company pays that tax, it becomes a 'credit' with the ATO. The company uses that 'credit' to fully frank dividends paid to shareholders. Once the credit runs out, no more fully franked dividends.

An accountant may be able to explain it more clearly, but that's my understanding of how it all works.

Hi guys,
V2 Media is on the right track but there are a few things he's missed.
Section 6-5 would apply to any income from a directors fee and dividends would be assessable under Section 44. Effectively, they're both forms of assessable income.

However, the franking credit is an interesting spanner in the works.
I'll give a quick case study.
$100 in profit is made...$30 is taxed by uncle johnny, leaving $70 as a distributable amount to shareholders.
When distributed, you can 'frank' the dividend by allocating the tax already paid on the $100 to that dividend.

When your income tax return is filled out at EOY, you're assessed on the grossed up dividend (exact amount will depend on franking percentage).
BUT...your tax bill is reduced by the $30 the company already paid on that profit.

Effectively, the franking system was a way to avoid the government taxing the income once at the company level and then again at the shareholder level.

If you've got access to a good accountant (call me) you could set up tax planning arrangements using trusts that will allow you to better control your affairs.

Hope this helped.