How Business Owners Should Pay Themselves: Salary vs Dividends vs Trust Distributions (Australia)

One of the most important, and often misunderstood decisions for Australian business owners is how to pay yourself.

If you’re running a business through a:

• company

• trust

• or a company + trust structure,

you usually have options for taking money out, including:

• wages/salary

• dividends

• trust distributions

Each option has different tax consequences, legal requirements, and cash flow impacts. Get it right, and you can save tax (legally), improve certainty, and grow wealth. Get it wrong, and you risk problems like:

• unexpected tax bills

• cash flow stress

• ATO attention

• Division 7A issues (for company owners)

• poor record keeping and compliance failures

This guide breaks down salary vs dividends vs trust distributions in a clear, practical way, so you can understand what they are, how they work, and when each might make sense.

First: Your Business Structure Changes Everything

Before comparing options, it’s important to understand that how you can pay yourself depends on your business structure.

Sole trader

• You don’t pay yourself a wage

• You take drawings from business profits

• You’re taxed personally on business profit (not on what you “withdraw”)

Company (Pty Ltd)

• You can pay yourself a salary (as an employee/director)

• You can receive dividends as a shareholder

• Loans and drawings can trigger Division 7A if not managed

Trust (family trust)

• You can distribute income to beneficiaries (including yourself)

• Trust distributions must follow trust deed rules

• No “dividends” (because trusts don’t issue shares)

Company + trust (common structure)

• Often used for flexibility and tax planning

• The trust may own shares in the company

• Income might flow through multiple layers depending on design

The right “pay yourself” strategy almost always starts with confirming your structure and goals, not just choosing what seems tax-effective in the short term.

Option 1: Paying Yourself a Salary (Wages)

What it is

A salary is regular pay you receive from your business (usually from a company). It’s treated like standard employment income.

Your business pays you through payroll, and you pay personal tax through PAYG withholding.

How it works

If you pay yourself a salary, you usually need to:

• run payroll

• withhold PAYG tax

• pay super guarantee (if applicable)

• report via Single Touch Payroll (STP)

• include the wage expense in business accounts

Pros of paying a salary

• Predictable income: easier for budgeting and personal lending

• Tax-deductible for the business (for companies)

• Super is usually paid: helps build retirement wealth

• Cleaner compliance: especially when structured properly

• Can be useful for consistent cash flow businesses

Cons of paying a salary

• May result in higher personal tax if your salary pushes you into higher brackets

• Requires payroll admin and reporting

• Super obligations can increase costs

• Less flexible if business income is irregular

When salary often makes sense

Salary can be a good option if:

• you want stable income each month

• you’re applying for a mortgage and want payslips

• your company generates consistent profit

• you want a simple, compliant baseline strategy

Option 2: Paying Yourself Dividends (Company Profits)

What it is

A dividend is a payment to shareholders from the company’s profits.

Dividends are not a wage, they’re profit distribution.

If your company pays dividends, they:

• must come from profits

• must be declared properly

• must be paid to shareholders according to share ownership

Franked vs unfranked dividends (simple explanation)

Dividends can be:

• Franked: company has already paid tax, and you receive a franking credit

• Unfranked: no franking credits attached

Franking credits can reduce your personal tax. Depending on your personal taxable income and circumstances.

Always check current ATO rules and accounting advice, because franking outcomes depend on tax rates and company tax already paid.

Pros of dividends

• Can be tax-effective depending on your personal tax position

• No super guarantee costs on dividends

• More flexibility than wages (can pay annually or quarterly)

• Can utilise franking credits for some taxpayers

• Useful when you don’t need consistent weekly income

Cons of dividends

• You need profits. Dividends can’t be paid if there’s no profit

• Must be declared correctly and documented

• Can create personal tax bills (depending on the dividend size)

• Less stable income for lending compared to wages

• Not available if you’re not a shareholder

When dividends often make sense

Dividends can work well if:

• your company is profitable

• you don’t need regular wages

• you want flexibility in timing

• you want to use franking credits strategically

• you want to distribute profits to multiple shareholders (e.g., spouse shareholders)

Option 3: Paying Yourself Trust Distributions (Family Trust)

What it is

A trust distribution is when a trust allocates its income to beneficiaries (like you, your spouse, or adult children).

This is common for business owners operating through a family trust, or where a trust owns shares in a company.

How it works

The trust earns income and then, at the end of the financial year, it distributes (allocates) that income to beneficiaries.

Beneficiaries pay tax at their own marginal tax rates.

Trusts are often used for:

• income splitting across family members

• asset protection (depending on structure)

• flexibility in distributing profits

Pros of trust distributions

• High flexibility in who receives income

• Potential to distribute income to lower-tax beneficiaries (where legally permitted)

• Can be powerful for families with multiple adult beneficiaries

• Useful in combination with companies and bucket company strategies

• Often supports asset protection goals (depending on design)

Cons of trust distributions

• Must follow trust deed rules

• Must be properly resolved and documented before deadlines

• Beneficiaries must be eligible and tax outcomes can be complex

• ATO scrutiny has increased in recent years on trust distribution strategies

• Can create compliance risk if done incorrectly

When trust distributions often make sense

Trust distributions can be useful if:

• your business income is earned in a trust

• you want income flexibility across family

• you have adult beneficiaries with lower taxable income

• you’re building long-term family wealth

• you have a trust structure for asset protection or investment purposes

Key Differences: Salary vs Dividends vs Trust Distributions

Here’s the simple comparison:

Salary (wages)

• Paid regularly via payroll

• Tax withheld through PAYG

• Usually includes super

• Business gets a tax deduction (in companies)

• Good for stability and lending

Dividends (company profits)

• Paid from company profits to shareholders

• May come with franking credits

• No super guarantee

• More flexible timing

• Requires profits and proper declarations

Trust distributions

• Allocated at year-end to beneficiaries

• Beneficiaries pay tax at their rates

• Highly flexible within legal rules

• Requires strong compliance and documentation

• Common for income splitting and wealth planning

What’s the “Best” Way to Pay Yourself?

Most Australian business owners don’t choose just one. Often, the best approach is a mix based on:

• how stable your business cash flow is

• your personal tax bracket

• your spouse’s income

• your structure (company/trust)

• whether you want to build super

• whether you need income proof for lending

• long-term business and wealth goals

A common strategy (in plain terms)

Many business owners take:

1. a reasonable salary for stability + super

2. dividends or trust distributions for profit extraction and tax planning

3. retain some profits inside the business for growth and buffers

But the right mix depends on your numbers.

Examples: How Different Business Owners Might Pay Themselves

Example 1: Company owner needing stable income

A director runs a marketing agency through a Pty Ltd company. Income is stable.

A practical approach may be:

• a consistent salary for monthly living costs and borrowing capacity

• a dividend at year-end if profits allow

Example 2: Trust-based business with family beneficiaries

A trades business operates through a family trust. One spouse works part-time.

A possible approach:

• distribute trust income between spouse beneficiaries (within legal rules)

• retain some profit for cash flow

• contribute to super for retirement planning (as a separate strategy)

Example 3: High-growth business owner

A business owner wants to reinvest heavily in the business and minimise personal drawings.

A possible approach:

• pay a modest salary to cover basics

• leave profits in the company/trust to fund growth

• manage tax planning carefully across years

The ATO and Compliance: What Business Owners Must Get Right

Paying yourself isn’t only about “tax effectiveness”. It must also be compliant.

Things to get right:

• correct structure set-up

• proper bookkeeping and records

• clear separation of business vs personal expenses

• correct payroll reporting (STP) if paying salary

• accurate dividend documentation if paying dividends

• proper trust distribution resolutions and beneficiary records

• avoid “random transfers” that become problematic later

Common ATO red flags:

• inconsistent trust distributions without commercial reasoning

• unpaid entitlements without proper documentation

• directors taking money as “loans” without Division 7A compliance

• personal spending through business accounts

• poor record keeping and late resolutions

In many cases, the tax risk isn’t the strategy. It’s the lack of documentation and structure behind it.

Common Mistakes to Avoid

Mistake 1: Paying yourself randomly

Many business owners take money out “as needed” without tracking what it is.

This creates issues like:

• unclear tax reporting

• director loan problems

• inaccurate accounts

• cash flow and planning issues

Mistake 2: Ignoring super obligations

If you’re paying salary/wages, super may apply.

Not paying super properly can lead to:

• penalties

• super guarantee charge

• ATO enforcement action

Mistake 3: Assuming trust distributions are always tax-saving

Trust distributions can be useful. But the ATO has rules about:

• who can receive distributions

• whether beneficiaries are actually entitled

• the documentation required

• how income is allocated

Mistake 4: Forgetting the personal tax bill

Dividends and trust distributions can cause personal tax bills, especially if:

• you receive a large year-end distribution

• you haven’t set aside money for tax

• you don’t plan your withholding and instalments

Key Takeaways

• Salary = stable income, payroll compliance, often super included

• Dividends = profit distribution from a company, may include franking credits

• Trust distributions = flexible allocation to beneficiaries, requires strong documentation

• The “best” method is often a mix

• Your structure and goals matter more than one-size strategies

• Compliance and record keeping are as important as tax outcomes

• Get professional advice before making changes; especially if large amounts are involved

FAQ 

1) Should I pay myself a salary from my company?

Many business owners do, especially for stable income and lending purposes. Whether it’s the best option depends on profits, cash flow, and tax position.

2) Are dividends better than salary in Australia?

Not always. Dividends can be flexible and tax-effective in some cases, but they require company profits and correct documentation. A mix is often used.

3) What is a trust distribution and how is it taxed?

A trust distribution is income allocated from a trust to beneficiaries. The beneficiary pays tax on that income at their marginal tax rate.

4) Can I pay myself dividends without paying a salary?

Yes, if you are a shareholder and the company is profitable. Some owners do this, but it can create income volatility and personal tax planning needs.

5) What happens if I take money from my company without declaring it properly?

It can create compliance issues like Division 7A loans, incorrect accounts, and ATO penalties. It’s best to document all payments clearly.

How you pay yourself as a business owner isn’t just a “tax question”, it’s a strategy decision that affects:

• your lifestyle and cash flow

• your tax bill

• your super and long-term wealth

• your compliance risk

• your ability to grow and reinvest

The best approach is usually a well-planned mix of salary, dividends and/or trust distributions, tailored to your business structure and personal circumstances.

Still asking “what if” about your finances?

That’s exactly where clarity begins.

Whether you’re planning ahead, growing wealth, or simply want confidence in your financial decisions, the advisers at What If Advice can help you turn questions into a clear, personalised plan.

👉 Book a free 15-minute strategy session or get in touch today at
whatifadvice.com.au 

General Advice Disclaimer

This information is general in nature and does not take into account your personal financial situation, needs, or objectives. You should consider whether it is appropriate for you and seek personal financial advice before making any decisions.