How to Draw down from Company Profits with Lowest Tax?

L[Deactivated] on 15/06/2024 - 06:13

Hi all -

My company has done ok past few yrs, and sitting on a multi 7 figures profit in PnL

Business has slowed down substantially now, reaching a point where I am considering winding it down

Keen to hear opinions on how to draw down remaining profits without giving away over 30% back in taxes

I am personally in the highest tax bracket- are there any strategies to lower tax on dividend payout?

for every 1MM, below is the math i believe is the tax liability

To distribute 1million after tax profits as dividends
👇

Grossed-up dividend: $1,333,333.33
• Tax on grossed-up amount: $600,000
• Franking credits: $333,333.33
• Net tax liability: $266,666.67
• Medicare Levy: $26,666.67
• Total tax liability: $293,333.34

individual’s total tax liability, including the Medicare Levy, would be approximately $293,333.34

——————

PS: I have consulted my accountant, he recommends I leave it in company account and drawdown once i no longer have income, which could be 20-30yrs down the line after retirement ?

keen to hear thoughts on this option as well!

If this is your recommendation, what should i do with the saving? Put that into an ETF/cd in company name?

Financial

Comments

  • bemybubble on 15/06/2024 - 06:28

    Invest the cash in the company to buy something. Treat it like ‘super’ but without the restrictions.

    • [Deactivated] on 15/06/2024 - 07:38

      My account says I shouldn’t buy in things like a car 🥲 as business revenue has dropped substantially,

      And it will draw ATO attention, other option left is ETF/real estate

      Both of which doesn’t get the 50% CGT discount like individuals

      • bemybubble on 15/06/2024 - 07:42

        Don’t buy a car that will attract div7a if you’re no longer trading especially (unless you lease off your company at arms length).

        Don’t let the 50% discount dissuade you. Think about it. Highest marginal rate is 47%. Half is 23.5%. Compare that to the company tax.

        When you say business slowed down. Was that due to factors outside your control?? If the latter and If you were getting wages from your company you might consider paying a tax free redundancy 🤔

        On second thought though you would also consider not investing using a company that had previously been exposed to commercial risk. Personally I’d wind it up along with any potential skeletons. Cop the tax and move on…

        • [Deactivated] on 15/06/2024 - 07:57

          Yes I thought about that too, although my company industry is in low risk of any litigation, u never know what happens !

          Unfortunately business slowed down due to slow down in economy- companies aren’t investing in IT projects as much as they did pre/post covid

          It will ramp up again year or 2 down the road- my goal is to setup new entity as family trust instead of pty ltd

          From everything I have read, there are some benefits to trust

          • bemybubble on 15/06/2024 - 07:59

            @[Deactivated]:

            From everything I have read, there are some benefits to trust

            Absolutely

            Yes I thought about that too, although my company industry is in low risk of any litigation, u never know what happens !

            I’ve had people who 5 years after trading someone came back to take a bite. They were also low risk. But low risk isn’t no risk.

  • scotty on 15/06/2024 - 07:17

    Are you the sole shareholder? That would make the situation trickier.

    You can always just invest use the P/L's money, in ETF or CD or whatever. However without trading activities, i.e. all the income for your company would be passive, your P/L be paying 30% tax rather than 25%. Company also doesn't get CGT discount after you hold an asset for more than 12 months.

    Why are you still on the highest personal tax bracket after winding down the company, i.e. are you earning a salary elsewhere? Why not just retire 20 years earlier :)

    Disclaimer: this is not a financial advice.

    • [Deactivated] on 15/06/2024 - 07:45
      -2

      I am the sole owner unfortunately- I wish i setup company as a family trust instead, I have heard i could distribute some profits to family members such as kids below 18? And thats a way to distribute profits to low tax bracket members of family?

      Water under the bridge

      Its too late now unfortunately-

      Yes, since company business is down substantially- I have taken up PAYG full time job, so in the 180k+ tax bracket :’(

      You are absolutely right about the 30% tax rate for company for passive income+ no 50% CGT discount, this is why I keep thinking of just throwing in the towel and giving ATO their share and use funds in whatever way i want

      but it hurts to see that kind of tax liability, I worked very hard for the business to make the money

      I have heard loans from company? By my accountant said ATO has set minimum loan rate of 8.5% or something around that!

      so that doesn’t make sense as an option

      • scotty on 15/06/2024 - 08:02
        +1

        I have heard loans from company?

        There are whole lot of articles about Div7a that you can read about. Yes ATO dictate the interest rate so you can't really loan to yourself interest free. Moreover it gets complicated if the repayment is more than 7 years. Useful if you want to buy something expensive but don't have enough cash in your personal account, as the interest you pay becomes the earnings of the company (which is taxable), but doesn't really solve your problem of drawing down the money as you still need to pay back.

        As you've mentioned trust distribution to minors — maybe keep on trading and employ family members to do trivial tasks? You'll need to pay them super though.

        Again, this is not a financial advice, and please check with your accountant (which you obviously would do).

      • Muzeeb on 15/06/2024 - 09:53
        +5

        but it hurts to see that kind of tax liability, I worked very hard for the business to make the money

        I work very hard for another business to make money and as a payg employee I pay a shit tonne in tax with stuff all deductions.

        It is what it is.

      • SBOB on 15/06/2024 - 10:54
        +3

        but it hurts to see that kind of tax liability, I worked very hard for the business to make the money

        On your $1mill example your total effective tax rate/cost is under 30%.
        Congrats, you made a large sum of money as a sole business owner now sitting on multi million $ in company profits. Paying tax on company earnings is part of doing business.

    • [Deactivated] on 15/06/2024 - 07:46

      Btw thank u so much for detailed response, absolutely understand you are just sharing your opinion- no financial advice

      Really appreciate you taking time to share useful information

  • AndyC1 on 15/06/2024 - 08:10

    Company loan for bitcoin investment.

    • [Deactivated] on 15/06/2024 - 08:15

      Could you please explain this further?

      ATO has set minimum loan rates, which are quite high atm- Bitcoin being a volatile asset, this can go for a toss

      • AndyC1 on 15/06/2024 - 08:38
        +7

        Took it hook line and sinker. If you think my post was advice then you were mistaken. You need professional advice and not advice from bargain hunters.

        • [Deactivated] on 15/06/2024 - 08:47
          +1

          Mate u underestimate collective intelligence of this community 😅

          Beats the professionals lol

  • mskeggs on 15/06/2024 - 09:20
    +3

    Instead of starting from, “how do I avoid tax?”, start from “this is my financial goal.”

    If you wanted to take a year off in the next while, for example, you could leave it until then.
    If you wanted to buy a house, your company could buy it for you as a place of business. If you wanted to retire early, you could take dividends then.
    If you wanted to spread the effort of administering the business, you might employ a spouse or relative as a director, especially if they had low income otherwise. And when you ramp things up again, make them redundant.

    Jumping through hoops to get the money now, just moves the issue of managing the money tax effectively to you personally, with even fewer strategies available.

    • Dollar General on 15/06/2024 - 09:51

      How do I avoid tax & how can I get the pension are the starting points for too many people these days

      • ihbh on 15/06/2024 - 09:57

        I doubt OP is thinking about the pension. There are plenty of us saving/investing for our retirement.

        • Dollar General on 15/06/2024 - 10:59

          It was in reference to the general population not OP

  • ihbh on 15/06/2024 - 09:28

    At initial set up stage, you needed at least this structure:

    You Director => Corporate Trustee => Family Trust .=> Company

    Too late now to set up; will incur CGT, transaction costs.

    You can borrow from company and pay appropriate interest to access funds until say in retirement when your income is lower.

    There is also the possibility of buying loss making businesses for less than the benefit but if you have no experience in this area, you might end up being penny wise and pound foolish.

    I personally would retire early/take a long career break and gradually access the profits. Do you have any hobbies?

    • Muzeeb on 15/06/2024 - 09:54
      +1

      Do you have any hobbies?

      Avoiding tax

    • ihbh on 15/06/2024 - 09:58
      +2

      Forgot to ask, what's your super balance like? Can make deductible contribution to super depending on your situation. Obviously funds will be locked away until later

      • [Deactivated] on 15/06/2024 - 13:39

        Thank u- my super balance is around 220k now, I am still 28yrs+ away from reaching retirement age(65+)

        I also have 401k from my work in the US, I did make a 55k carry forward super contribution - so i am at max now, any further super contributions wont be taxed at the 15% rate

        I really wish i setup my company like you mentioned above, too late now- unfortunately got a useless accountant who advised me this to setup this way!

  • Typical16-bitEnjoyer on 15/06/2024 - 10:51
    +1

    Google "list of non-extradition countries" for research.

  • samyall on 15/06/2024 - 10:53

    My opinion is you should pay the tax as the profits are income like any other but isn't this situation exactly what negative gearing is for? use depreciation on properties to offset the tax on the company profits over the course of 10 years?

  • justworld on 15/06/2024 - 11:09
    +1

    You are lucky you pay only company tax rates- spare a thought for all of us wage/PSI earners paying 47% on most of our incomes

    • SBOB on 15/06/2024 - 11:22

      paying 47% on most of our incomes

      You'd have to be an incredibly high payg earner to somehow come to a 47% on "most" of your income.

      • justworld on 15/06/2024 - 11:40

        $361k gets you there

        • SBOB on 15/06/2024 - 11:47
          +1

          Guess depends on your threshold of most :)
          $361k has total tax rate of about 42%
          (Though doubt many earning that salary would happily give it up for a lower tax rate)

  • datafellows on 15/06/2024 - 11:29

    I wouldn't leave it to the company for 20-30 years and withdraw some sum per year.

    Just think what you could have bought with a million bucks 30 years ago vs today?

    • freefall101 on 15/06/2024 - 12:32
      +1

      It doesn’t need to sit there as cash, it can earn investment income.

      • datafellows on 15/06/2024 - 12:34

        Oh yes, that makes a lot of sense :)

        • [Deactivated] on 15/06/2024 - 13:39
          +1

          Yes- i wouldn’t leave cash :)

          at worst i will invest in s&500/nasdaq ETF for 25yrs

  • AustriaBargain on 15/06/2024 - 12:15

    Cayman Islands.

  • JohnSy on 15/06/2024 - 12:59

    Member Since: 6 hours 40 min ago. I will bite and assume a legit query. Hopefully i haven't waisted my time.

    This is not financial / investment advice. I'll make some suggestions, but do your own research.

    Firstly well done.

    If you want it in your own name immediately then there is very little you can do, pay the tax and move on. If you are happy to leave the company in existence and treat it is a bank account for your future then read on.

    Things to consider:
    Have you bought a house yet? What is your age? How many years until you hit 60? What is your super fund balance (<500k)? Do you have any carry-forward concessional contributions available? Will you be in the highest taxable income bracket for the foreseeable future? Do you have a family and kids?
    All these things affect the optimal solution to some degree.

    If a company no longer runs a business, and just earns passive income by holding and investing retained earnings then its company tax rate/franking rate would become 30% on its earnings rather than its current rate. This is ok and is slightly beneficial.

    Think of the company as a tap. You want to minimise your tax by controlling the dividend flow each year to increase your income out of the highest tax bracket if it isn't there one year. eg it takes your income to 180k this year, 190k next year and so on. In the future, if you get the balance right, and don't have much income other than dividends you will end up with franking credits balancing tax owing as an individual.

    On the reverse side, you can use your concessional contributions to reduce your income each year, and use the carry forward concessional contributions when you need more than the usual remaining amount / or they are going to expire. This money will be available to you when you turn 60.

    In the meantime the company invests its assets in its own name in high-interest savings accounts / or diversified ETFs. It pays 30% tax on these earnings. You get this back when you declare a dividend. Cash has the advantage of liquidity if you want to use Div 7A loans etc.

    If you haven't bought a house yet, a DIV 7A loan is still a great source of funding. You could borrow the purchase price from the company as a DIV7a loan. The interest you pay is after all just going back to your own entity as income which you pay back to yourself as a dividend so it ultimately just costs you the individual tax rate of the payments of that subsequent dividend.

    You may as well prepay 10 years of company annual return fees since for the discounted rate since it is going to be around for a while.

    Oh and you could also start listening to financial independence podcasts, and work out how many years you plan to remain working for.

    • [Deactivated] on 15/06/2024 - 13:48
      -1

      Thank u so much for detailed reply, I created a new account for anonymity :-) definitely not trolling!

      I have confidence in the collective intelligence of this community than so called “experts” who provide financial advice- most of them use ChatGPT these days anyway

      I have bought a home + 1 IP- both in my personal name, i would love to pay off the mortgage on my PPOR - again, if it makes sense to borrow from my company and pay off the bank, i have about 650k mortgage left on the PPOR

      My super is below 500k , around 220k atm, no more concessional carry forward contributions left

      You gave me a lot to think about- dividend 7a loan to buy an IP in personal name could be another option

      The interest i pay will be tax deductible for me as it is for investment purposes

      And the interest goes back to my company minus the 30% interest which goes to govt taxes

      So far the IP + just simple index ETF investments seem like some decent options

      • JohnSy on 15/06/2024 - 15:20

        A Div 7A loan has no interest payable in the first year which is a good bonus. So if you started one on July 1st, thats no interest payment for that year. The next year the benchmark interest rate dictates the rate as shown here. https://www.ato.gov.au/tax-rates-and-codes/division-7a-bench… This year was 8.27%, the year before 4.77%.

        These rates are generally higher than a bank loan but you need to consider that you would still only ultimately be losing your "marginal tax rate * the interest rate" in the grand scheme of things as the example below shows.

        So worst case on the top tax bracket 0.47 * 8.27 = 3.88%.

        Working it out the long way. You have a loan for $120,918. No interest was paid in year 1. It is now year 2. The ATO has published the rate and in this example it is 8.27%. You therefore pay $10,000 in interest. Therefore the company gets $10,000 income. At year end company pays $3,000 in tax. In a subsequent year you decare a franked dividend for $7,000, which is $10,000 grossed up including the $3,000 dividend. So far so good. You now need to pay tax personally on that dividend. Lets say you are still at the top tax bracket 45% plus 2% medicare = 47%. 0.47 x 10000 = 4,700 in tax. $4700/$120918 = 3.88% notional interest rate since you own the company and all of the shares. If your marginal tax rate is lower, the notional interest rate is lower.

        Treat the company as your own personal bank. Ask yourself once again if you really need all the money in your own name immediately? Does it not make sense to get rid of any external debt and finance it through the private company?

  • Daniel Plainview on 15/06/2024 - 15:14
    -1

    LOL multi 7 figures profit in P&L and seeking complex financial advice from unsubstanciated strangers on a shopping forum. Best tool for the job? :-/

    You're obviously switched on to be in a conundrum like this so ask your company's chosen accountant to advise on this - am sure you can even run through as a company expense. You might get an idea or two on here that seem smart - but you will still need to run through a certified professional to be certain it's appropriate.

    • scotty on 15/06/2024 - 15:27
      +1

      If you have actually finished reading his post, you'll see that he has already consulted with his accountant, and he is basically seeking community advice. Are you sure there's no certified professionals or experienced business owners with similar experience here, who are willing to share their 2 cents?

  • iforgotmysocks on 15/06/2024 - 16:31

    Invest in some magic beans

  • dtc on 15/06/2024 - 18:39

    Haven’t you (well, the company) already paid 25% tax on the profit? Is your concern that when you pull it out, you have to pay the extra 22% because you are on 47%?

    Why do you need to pull it out if you ate earning $180k?

    Invest the money through the company - if you use the company to hold your cash/income assets (eg term deposits, bonds, infrastructure investments etc) then you save tax as the income each year is taxed much less than if you had the same investments in your own name

    Even when you don’t get the CGT exemption, the difference is only a few percent and you lose more by pulling the money out and then investing.

    All in all, there are a lot of reasons for keeping the money in the company, unless you need a lot of cash right now.

    You can also look at small business tax concessions although most of them are when you sell your company so might not apply

    • [Deactivated] on 17/06/2024 - 16:59

      Yes the company has already paid 25% in taxes. You are right, my concern is that I pay additional 30% on remaining profit in company's balance(as the 47% will be on the total grossed up amount before company paid taxes- not 22%, close to 30% on remaining cash)

      I was hoping it is just a little less hassle if I can consolidate my finances and close company accounts- even accountants charge $500-1000/yr to file for company tax returns, over 30yrs(if I hold to retirement) that's quite a bit of house keeping $$

      It appears I only have 2 decent options:

      1) take a loan from company for investment purpose and invest in ETF/IP- If I am in highest tax bracket , that loan interest will be tax deductible.
      2) Leave it in company name until retirement, just buy nasdaq/sp500 etf and deal with distribution at retirement

      Appreciate your inputs, I am leaning towards #1, will do the detailed math and make a decision soon.

      • ihbh on 17/06/2024 - 19:46

        Other thing to bear in mind is that because these assets are in your name, you have less protection (I don't mean from your wife) than say if they were in a family trust. Fortunately Australia isn't as litigious as the US.

      • dtc on 17/06/2024 - 23:38

        remember that Div 7A loans must be repaid within 7 years if unsecured. So they arent an everlasting 'just borrow the money and its all good until you retire' type thing. Not much point if you borrow and invest in ETFs only to have to sell them in 7 years to repay the loan. You can get longer terms if the loan is secured eg you can probably secure against the shares. But you need all the paperwork in place, proper loan agreement, repayment schedule, if its secured then you need a secured loan agreement.

        If you take out a loan it doesnt stop the need to keep filing company tax returns. So you arent really avoiding anything - if you want to close out your companies then close them out and pay the tax. If you want to keep them going then just invest through the company and pull the money out later on. A loan seems like the worst option, the company continues, you have to repay it, you have to pay interest and you pay more tax on the investment earnings.

  • Terbo on 21/06/2024 - 13:08

    Sounds like a terrible problem to have - you know how to make money but not what to do with it.

    You dont want retained profit in an operating company but the lack of forward planning shouldnt be an issue - I think you should be able to take advantage of the small business restructure rollover relief. Then you could move company share ownership from personal to family trust and distribute 25% franked dividends to the Trust, and then on to a bucket company, where it can then be invested for the long term, keep the operating company for the future - dont whinge about tax deductible accounting costs with $1m in your bank.

    The CGT provisions for company arent as good but depends on what you buy. You could just hold in a Credit fund and get ~7% on your $1m to generate $70K per year = $50K net, buy property and shares that you dont plan to sell for a long time, lend money out, go into partnership with your SMSF that you are maxing contributions on to buy something, probably through a unit trust so you can alter ownership balance more easily. Whenever you need to draw profit, the dividends just flow back out through the family trust.

    Even something as simple as buying a car and then associate leasing it to yourself through your employer, company generates income on the lease fee and claims depreciation on the vehicle value, employee gets some car cost paid pre tax, 100% if EV under $90K, no high cost novated lease finance required.

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