One strategy that must not be overlooked for Companies and Trusts is the payment of wages to working Directors or other family members working within the business. Individuals can earn up to $18,200 tax free whereas a Company pays tax at 28.5% on the first dollar of profit.
Paying a Wage to Associates
Take for example a company that has made $20,000 profit leading up to the end of financial year. If the profit remains inside the company it will be taxed at 28.5% for the 2015/16 financial year, meaning tax payable of $5,700 for the year. Assuming the business owner has no other, the company could pay the owner a wage of $18,200 for the year. This wage would be tax free to the individual and the company would get a tax deduction for payment of the wage. The company would need to pay 9.5% superannuation contributions on the wage, amounting to $1,729 and would again get a deduction for this payment in the current year if paid prior to 30 June. In this scenario the individual would have a wage of $18,200 and pay no tax. The company would have only $71 profit and pay $20 tax. This strategy would save the taxpayer almost $5700.
What if my business is not making any money?
Even if your business isn’t making a significant profit or has just started up and doesn’t have a large trading history it is still important that you review the use of this strategy. If an individual hasn’t used up their tax free threshold in a financial year the payment of a wage will increase the loss carried forward in the Trust or Company to next year.
For example, your business is running at a $2,000 loss, and you have no other income. If you pay superannuation of $1,729 and pay wages of $18,200 your loss for the year will be $21,929. So when your business eventually makes a profit, you will have a larger loss to use up before you start paying any tax.
Do you have to pay superannuation on the wage?
Yes, a wage paid to a Director or associate is classified as Ordinary Times Earnings and therefore, superannuation guarantee is applicable. The current superannuation guarantee rate is 9.5%. Remember if you make a payment for superannuation before 30 June you will receive a tax deduction in the current financial year. Any payments made after 30 June and before 28 July will be tax deductible in the following financial year.
It is important that you are reviewing your group tax position prior to 30 June each year to ensure you do not pay too much tax overall.