We are often asked whether it’s better for a business to pay Dividend or Wages. The following are useful points to consider:

Consider when paying a dividend:

 1.  Dividends are not tax deductible, rather they are paid from the retained earnings of the company.

 2.  Dividends are typically paid to the shareholders of the company, so their entitlement is fixed based on the number and type of shares held.

3.  It can be complex to change shareholdings, and this can result in unexpected tax consequences.

4.  Dividends are excluded from the Workers Compensation calculation and are exempt from payroll tax.

5.  Dividend payments may be franked.  The franking credits are passed on to the shareholders and used as tax credits.

6.  Dividends (unlike wages) do not have to be commercially realistic (The ATO would need to consider them as reasonable).  Refer to Section 26 – 35, Income Tax Assessment Act 1997.

7.  Dividend income is categorised as investment income, therefore the amount of deductions available to the recipient is typically less.

8.  Having the shares owned by a family trust gives even more flexibility as the dividends can be distributed to the beneficiaries of the family trust.


Consider when paying a wage:


1.  Wages are typically tax deductible when incurred.

2.  This will amount to at least a 25% tax savings in the name of the company.

3.  The payment of a wage will generally attract a corresponding minimum superannuation expense – currently 10% of ordinary times earnings.

4.  Wages are assessed for Worker’s Compensation and Payroll Tax requirements.

5.  Wages have to paid on a commercial basis.  This is not required for Dividends.

6.  Wages can be paid to any person as long as it is on commercial grounds.

If you would like to discuss further please contact us:
McNamara & Company - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandcompany.com.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.com

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