How to Pay Yourself From Your Melbourne Small Business: Salary vs Drawings

Sole Trader: Drawings, Not Wages

A sole trader and their business are the same legal entity, which means there's no such thing as the business paying the owner a wage. Money taken out for personal use is a drawing, not a deductible business expense and not subject to PAYG withholding. Instead, the sole trader pays personal income tax on the business's total net profit for the year at their individual marginal tax rate, regardless of how much cash was actually withdrawn versus left in the business bank account.

Company Directors: Wage, Dividend, or a Mix of Both

A company director can be paid a wage through payroll, with PAYG withholding and the 12% superannuation guarantee applying just as it would for any other employee, and this wage is a tax-deductible expense to the company. Alternatively, a director can receive dividends paid from the company's after-tax profit, which aren't a company tax deduction but carry franking credits reflecting tax the company has already paid, reducing the personal tax the director owes on that dividend. Most accountants recommend a considered mix of the two rather than relying solely on one, structured around both personal and company tax positions.

The Division 7A Trap for Company Directors

• ✓ Never treat company funds as available for personal use without a formal wage, dividend or complying loan
• ✓ Track the director loan account continuously, not just at year end
• ✓ Formalise any funds drawn ahead of a wage or dividend as a complying Division 7A loan before the lodgement deadline
• ✓ Review the director loan balance with your accountant before 30 June every year

Trust Distributions: Taxed Whether or Not You're Paid Cash

In a discretionary trust, the trustee must resolve before 30 June each year how that year's profit will be distributed among eligible beneficiaries. Each beneficiary then pays personal income tax on the amount distributed to them via their individual tax return, regardless of whether the actual cash was paid out or retained in the trust as an unpaid present entitlement, which itself carries its own compliance considerations if left outstanding too long.

Superannuation Isn't Automatic Outside a Wage

The 12% superannuation guarantee only applies where an owner is genuinely paid as an employee through payroll. Sole trader drawings and trust distributions don't attract compulsory superannuation, which means many business owners under those structures need to make deliberate voluntary personal contributions if they want their own retirement savings to keep growing at a similar rate to an employee's.