Under Australian tax law, there are several ways to withdraw company profits—and each has different consequences for cash flow, franking credits and ATO compliance for businesses. Choosing between dividends, salary, loans, capital returns or even liquidation requires careful planning. This guide outlines common options, key risks and why tailored small business tax advice is essential before you move money.
Franked vs unfranked dividends
Dividends remain the most common pathway. Franked dividends carry franking credits for company tax already paid, reducing top-up tax for many shareholders. Unfranked dividends are fully assessable, which can increase personal tax. Timing matters—planning distributions across years can smooth income and help manage thresholds.
Directors’ fees or salary
Paying market-based remuneration recognises services actually performed and is deductible to the company. Remember PAYG withholding, superannuation and payroll obligations. This approach helps demonstrate commercial substance, particularly in professional firms where the principal’s personal exertion is central to profit generation.
Division 7a loans
Loans to shareholders or associates can be tax effective only if they meet Division 7A rules: a written complying loan agreement by lodgement day, benchmark interest, and minimum yearly repayments. Miss these steps and you risk an unfranked deemed dividend. In a higher benchmark interest environment, repayments increase—so model affordability early and document cash flows carefully.
Trust distributions to companies
Where a company is a beneficiary of a trust, income can be taxed at the corporate rate. However, leaving unpaid present entitlements (UPEs) outstanding can raise Division 7A issues if the funds are used by individuals or the trust. Decide early: pay the UPE in cash, or place it on a complying Division 7A loan—supported by clear records.
Return of capital
A return of share capital is generally not taxable when paid, but it reduces the share cost base. If the payment exceeds the cost base, capital gains tax (CGT) may arise (for example under CGT event G1). Ensure the transaction reflects genuine capital and is documented accordingly.
Liquidation distributions
Winding up via a members’ voluntary liquidation can, in some cases, convert retained profits to capital under the Archer Brothers principle. This may allow CGT treatment (and, where eligible, small business CGT concessions). However, conditions are strict and ATO scrutiny is significant—particularly if the dominant purpose appears tax driven. Weigh loss of franking credits, costs, and the finality of closing the company.
Liquidate or drip-feed?
Liquidation provides a clean exit and potential access to concessions, but compresses tax outcomes into one event. Drip-feeding franked dividends preserves franking credits, lets you manage personal tax bands over time, and maintains flexibility—albeit with ongoing ASIC and tax compliance. The “right” choice depends on shareholder profiles, time horizons and risk appetite.
PSI cash already taxed
If personal services income (PSI) rules attribute income to the individual, the shareholder may withdraw matching amounts from the company without further tax—provided the payments align to the already taxed PSI and are properly evidenced. Good records are vital to avoid dividend treatment.
Division 7a: tips and traps
Put complying loan agreements in place before lodgement day, meet minimum repayments, and choose correct terms (7-year unsecured or 25-year secured). Avoid loan “re-characterisations” late in the year that create PAYG and super issues. Be careful with loans to associates and with trust UPEs—Division 7A can still apply. Higher benchmark rates amplify cash-flow pressure and audit risk.
Managing top-up tax
Practical strategies include allocating franked dividends to lower-taxed family members (where appropriate), timing distributions for lower-income years, bringing forward deductible expenses or super contributions, and using bucket companies to cap tax at the base corporate rate. Structure and documentation must reflect genuine commercial purpose—avoid artificial income splitting.
Dividend access shares
Dividend access shares (DAS) can be high risk. Without genuine commercial rationale, consistent rights and proper valuation, the ATO may apply Part IVA or treat benefits as dividends. Red flags include selective large dividends with no real investment or risk by the DAS holder. Extreme caution and specialist advice are essential.
Professional firms: pcg 2021/4
For professional firms using companies or trusts, the ATO’s PCG 2021/4 sets out gateways and a scoring model to assess risk. Ensure the principal is appropriately rewarded, profits reflect personal exertion, and arrangements align with commercial substance. Retained profits used to defer tax can elevate risk—review remuneration settings annually.
What to do next
Before moving money, map your options against objectives, cash flow and risk. Test Division 7A compliance, consider whether franked dividends or a staged plan suit your situation, and only contemplate liquidation with a robust commercial case. Looking ahead, keep governance tight and revisit settings each year. For related topics, explore our resources on business structuring advice and tax planning strategies Australia on our website.
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NEED HELP? This article provides general information and should not be considered legal or tax advice. For personalised guidance, please contact our expert team of tax accountants at The Quinn Group by calling 1300 QUINNS (1300 784 667) or +61 2 9223 9166, or submit an online enquiry form to arrange an appointment.
