Can I Pay Myself Through Dividends Instead of a Salary?

In Short

• Company directors in Australia can pay themselves by salary, dividends, or a combination of both, but each option has different tax and legal consequences.

• Dividends can only be paid from company profits and must meet strict legal requirements.

• The best approach depends on profitability, tax position, compliance duties and personal financial needs.

Tips for Businesses
Review your company’s profitability, cash flow and tax position before choosing how to pay yourself. Make sure dividend payments meet legal requirements, are properly documented, and proportionally paid to shareholders. If using a salary, comply with payroll, superannuation and tax obligations. Many businesses use a hybrid model to balance income stability, tax efficiency and compliance.

Summary
This article explains how Australian business owners operating through companies can pay themselves using dividends, salary, or a combination of both, and the legal and tax implications of each option. It provides practical guidance prepared by LegalVision’s business lawyers, who specialise in advising clients on corporate governance, director remuneration and compliance.

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Table of Contents

• Understanding Your Payment Framework
• The Mechanics of Dividend Payments
• Advantages of Choosing Dividend Payments
• Understanding the Limitations and Challenges
• Taking a Hybrid Approach
• Compliance and Administrative Considerations
• Key Takeaways
• Frequently Asked Questions

As a business owner operating through a company structure, determining how to pay yourself is one of the most significant financial decisions you will make. Many company directors question whether they can forgo traditional salary payments in favour of dividend distributions. The short answer is yes, but this decision involves complex considerations that extend far beyond simple preference. Understanding the implications of both salary and dividend payments is essential for making an informed decision that aligns with your business goals and financial needs.

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Understanding Your Payment Framework

When you operate your business through a company structure, you have several distinct options for extracting value from your business. Unlike sole traders who can simply withdraw funds directly from their business accounts and pay tax on total business profits, company directors must navigate a more structured approach.

You can pay yourself through regular salary payments that function like: 

• traditional employment arrangements;
• dividend distributions that represent your share of company profits; or 
• implement a combination of both methods. 

Each approach carries unique tax implications, administrative requirements, and compliance obligations that must be carefully evaluated against your specific circumstances.

The Mechanics of Dividend Payments

Dividend payments operate under a specific legal and tax framework that differs significantly from salary arrangements. When your company generates profits and pays the required company tax, it can then distribute remaining profits to shareholders as dividends. In order to do so, the company will need to adopt a dividend policy in accordance with its constituent documents.

Under the law, a company can pay a dividend only if it meets certain circumstances. A company must not pay a dividend unless:

• the company’s assets are greater than its liabilities when it declares the dividend and the difference is enough to pay the dividend;
• the payment of the dividend is fair and reasonable to the shareholders as a whole; and
• the payment of the dividend does not affect the company’s ability to pay its debts.

The process requires careful documentation and compliance with corporate law requirements. Your company must: 

• maintain proper records of profit generation; 
• issue distribution statements to shareholders showing dividend amounts and attached franking credits; and 
• ensure that any dividend payments are made proportionally among all shareholders. 

Advantages of Choosing Dividend Payments

Dividend payments offer several advantages that make them attractive to many business owners. Most importantly, dividends avoid many of the employment-related costs and obligations that come with salary payments. You would not need to make the following: 

• superannuation guarantee contributions; 
• pay workers’ compensation insurance premiums; or 
• have payroll tax obligations in most circumstances. 

This can result in substantial cost savings, particularly for businesses where the owner is the primary or sole employee.

The tax efficiency potential of franked dividends represents another advantage. When your company pays tax at the small business rate of 25%, and your personal marginal tax rate is higher, the franking credit system can provide benefits. Franking credits give you credit for the tax the company has already paid, which can reduce your personal tax bill compared to taking the same income as a salary.

Understanding the Limitations and Challenges

Despite their benefits, dividends are not suitable for every business owner. Dividends can only be paid from company profits, so if your business is not profitable, you cannot pay dividends, regardless of how much cash the company holds. This means dividend strategies work best for businesses with stable, consistent profits.

Furthermore, tax management is more complex with dividends. Unlike salaries, where tax is automatically withheld, dividend recipients must manage their own tax obligations, which can mean quarterly tax instalments or a large tax bill at the end of the financial year.

Taking a Hybrid Approach

Many business owners find that combining salary and dividends offers the best balance. This approach usually involves paying a modest base salary to cover essential living costs, with additional income taken as dividends when the company generates surplus profits.

The base salary serves multiple purposes beyond simple income provision. It establishes a clear employment relationship that can be important for various business purposes, including: 

• loan applications; 
• insurance coverage; and 
• regulatory compliance. 

The salary also ensures that you are making regular superannuation contributions for retirement planning, which dividend payments do not automatically provide.

Compliance and Administrative Considerations

The administrative burden associated with your chosen payment method can significantly impact your business operations and costs. Salary payments require ongoing compliance with: 

• Single Touch Payroll reporting; 
• regular PAYG withholding remittances; 
• superannuation guarantee contributions; and 
• potentially workers’ compensation insurance.

Dividend payments, while avoiding employment-related compliance, create their own administrative requirements. You must maintain detailed records of: 

• company profits; 
• board resolutions authorising dividend payments; 
• franking account balances; and 
• distribution statements for all shareholders. 

Key Takeaways

The decision between salary and dividend payments ultimately depends on your unique combination of the following: 

• business circumstances; 
• personal financial needs; and 
• long-term objectives. 

Salary-based approaches work well when you prioritise income predictability, simplified tax management, and straightforward compliance obligations. Dividend payments become attractive when your company generates consistent profits, and you can benefit from franking credits.

LegalVision provides ongoing legal support for Australian companies through our fixed-fee legal membership. Our experienced lawyers help businesses manage contracts, employment law, disputes, intellectual property and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.

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