Before you can decide about the best way to pay yourself for your hard work in your business, you need to understand about structures.
9 times out of 10, if you’re a young family in a small business, your ideal structure is a company and a discretionary trust.
Another name for discretionary trusts are family trusts. Young family, family trusts.
Why are family trusts a great thing for young families and small business?
They’re called discretionary trusts because you can have the discretion about who and how, and maybe even when, taxes paid on money that you earn.
This is really important when trying to figure out how you’re going to pay yourself for all your hard work.
Let me give you an example, let’s say your kids are at uni right now, which means they’re over eighteen, but they’re earning a minimum wage to keep them going while they’re studying.
They’re perfect opportunity for us to distribute income from the family trust to them so that the tax is paid at a far lower rate than if it is was in your name.
Let me get another example, parents who are on the pension, those who are retired, they’re another perfect opportunity for us to distribute income that’s earned in the family trust to them so it’s paid at a far lower tax rate. Family trusts, 9 times out of 10, are the way to go.
How do you pay yourself out of your business?
First of all, here’s how not to.
If you’re currently set up earning a salary out of your business, not ideal. Because in a salary, if you’re in an employee of your own business, you don’t have the discretion or the freedom of choice about if and when and how super and tax is paid.
You have to pay because you’re an employee. If you are taking a loan or drawing out of your company, that could trigger all sorts of ugly things like Div 7A, which makes life really tough and you end up paying a really high tax on it. That is not ideal either.
You could be paying yourself as a dividend out of a company.
Again, equally as ugly and nothing is as beautiful as a loan or a drawing out of your trust.
Here’s your next steps: If you’re a young family in a small business, and you don’t currently have a company and family trust, we need to talk.
If you do have a family trust set up but you cannot tell me, hand over heart, that you understand how it works, how to maximise the tax paid, or what the long-term strategy is, we need to talk.
If you’re paying yourself a salary or treating yourself as an employee of your own business, if you’re taking a drawing out of a company, or if you’re got a dividends is paying, or you’re taking a dividend from your company, again, we need to talk.
Why? When we spoke to the Ponters they were doing things the way that their accountant had them set up. They were being paid a salary out of their own structure.
Now, we’ve rejigged how they’ve been paying themselves using the power of a family trust or a discretionary trust.
Remember, you can have the discretion about who, how, and potentially when the tax is paid, and in so doing, save them $37,000 in tax.
So, we need to talk. Thanks guys.