Salary vs Dividends

Once your business is in a company, the question I get is simple to ask and easy to get wrong: should I pay myself a salary or a dividend? Most people assume one of them is cheaper. At the same income, they are not. The imputation system makes salary and a franked dividend land at roughly the same place, because you end up paying tax at your own marginal rate either way.

What actually decides it is super, cash-flow timing, how much your company can frank, and one trap that catches people every year. Here is how I walk a client through it.

“Dividends are cheaper because the company already paid tax.” No.

This is the myth I unpick most often. A franked dividend is paid out of profit the company has already paid 25% tax on. When it reaches you, it carries a franking credit for that 25%. You add the credit back, get taxed at your marginal rate, and the credit is then subtracted from your bill.

The franking credit is not a discount. It exists so the same profit is not taxed twice, once in the company and again in your hands. If your marginal rate is above the company rate, you top up the difference. If it is below, the excess credit can even be refunded to you. Either way you finish at your rate, not at 25%.

Figure 1: trace both routes and they meet at your marginal rate. The mechanics on the way there are what differ.

So what actually differs?

If the end tax rate is roughly the same, the decision comes down to four things.

Super. Only a salary generates super guarantee. For 2025-26 that is 12% of your ordinary time earnings, and concessional contributions are taxed at just 15% in the fund instead of your marginal rate. A dividend builds no super at all. For most owners, the forced retirement saving is the strongest argument for paying at least a base wage.

Timing and cash flow. Salary comes with PAYG withholding, so tax is paid steadily across the year and there is no nasty lump sum in October. Dividends have no withholding, which gives flexibility but also means you have to set the tax aside yourself. People who are not disciplined about that get a shock at lodgment.

Your franking account. A company can only frank a dividend to the extent it has actually paid tax. A young company, or one that has used losses, may not have the franking credits to pay a fully franked dividend. Salary does not depend on that balance.

Division 293 at the top end. If your income plus concessional contributions clears $250,000, an extra 15% hits those contributions, so super goes in at 30% rather than 15%. Still worth doing, just by less than people assume. It is a reason to plan the salary and dividend mix rather than default to one.

And the trap: do not just draw cash. If you take money out of the company through the year and plan to “sort it out at tax time,” that is not a wage or a dividend. It is a loan, and Division 7A can treat it as an unfranked deemed dividend, taxed in full with no franking credit. The fix is to decide, before year end, what is salary and what is dividend, and document it.

What I tell clients. For most owner-run companies I set a base salary first. It captures the 12% super, it smooths the tax across the year through PAYG, and it gives the bank an income figure if they ever want to borrow. Then, once we know the company has the franking credits, we top up with a franked dividend for the rest of what they want to draw. The version that goes wrong is always the same: the client takes money out of the company whenever they need it, calls it nothing in particular, and we meet in July with a five-figure Division 7A problem to unwind. Same cash in their pocket, far worse outcome, purely because nobody decided what it was at the time.

So which one?

Figure 2: most owners run both. The split is a planning decision, not a one-time choice.

There is no single right answer, and the mix usually changes year to year with the company’s profit and your other income. The discipline that matters is deciding deliberately, paying it properly, and keeping the records to back it. If you package other benefits on top of a wage, watch the FBT side too.

The detail, for the record

Rates and figures below are for the 2025-26 income year unless stated. Anything announced but not yet enacted is marked.

Paying a salary

• Deductible + PAYG. Salary and wages are deductible to the company and subject to PAYG withholding (Pay As You Go), remitted to the ATO and reported on activity statements.
• Super guarantee. 12% of ordinary time earnings for 2025-26 (up from 11.5%). The maximum contribution base is $62,500 per quarter, capping required SG at $7,500 per quarter per employee. Quarterly SG is due 28 days after quarter end. From 1 July 2026, Payday Super requires super to be paid with each pay run and received by the fund within 7 business days.
• Concessional cap. Concessional contributions (SG plus salary sacrifice plus personal deductible) are capped at $30,000 for 2025-26 and taxed at 15% inside the fund.
• Division 293. Where income plus concessional contributions exceeds $250,000, an extra 15% applies to the contributions (effective 30%). The threshold has been unchanged since 1 July 2017.

Paying a franked dividend

• Imputation. Franked dividends carry franking credits for company tax already paid (imputation system, Division 207 ITAA 1997). The shareholder grosses up the dividend by the credit, is taxed at their marginal rate, and offsets the credit against tax payable.
• Maximum franking rate. A dividend can be franked only to the extent the company has paid tax. The maximum franking rate equals the company tax rate: 25% for a base rate entity, otherwise 30%.
• Refundable credits. Excess franking credits are refundable to resident individuals once tax and Medicare levy are met (refund of franking credits).
• Holding period rule. Where total franking credit entitlement is $5,000 or more, shares must be held at risk for at least 45 days (90 days for preference shares) to claim the offset.
• No super, no withholding. Dividends do not attract super guarantee or PAYG withholding. The shareholder is responsible for setting aside the tax.

Drawing cash without declaring it

• Division 7A. Loans, payments or forgiven debts to shareholders or their associates can be a deemed unfranked dividend under Division 7A (Part III, ITAA 1936) unless repaid or placed on a complying loan before the company’s lodgment day. The benchmark interest rate is 8.37% for 2025-26 and 8.77% for 2026-27.

Marginal rates 2025-26 (resident, before 2% Medicare levy)

• $0 to $18,200 nil; $18,201 to $45,000 at 16%; $45,001 to $135,000 at 30%; $135,001 to $190,000 at 37%; $190,001 and over at 45%. The 16% rate is legislated to fall to 15% from 1 July 2026.

The hard part is not the theory, it is paying yourself the same way all year and keeping it clean. Homepedia Tax Assistant tracks the PAYG, super and dividend mix and your BAS so the year-end is a formality, not a Division 7A clean-up.

This article is general information, not personal tax advice. The right salary and dividend mix depends on your full circumstances. Talk to a registered tax agent before acting.