Paying directors and owners in Australia
Reviewed by Mellow Editorial Team, HR & payroll content team
Paying yourself or a company director in Australia requires a clear decision about the payment method — salary, dividend, or a combination — because each carries different tax, superannuation and compliance obligations.
Salary versus dividends: the core choice
Most small business owners pay themselves through one or both of two mechanisms: a director's salary (or wage) drawn from the company, or a dividend distributed from company profits.
A director's salary is treated as employment income. That means it is subject to PAYG withholding, the 2% Medicare levy, and any applicable HECS/HELP repayment obligations. It also counts as ordinary time earnings for superannuation purposes, meaning the company must pay the Superannuation Guarantee — currently 12% of ordinary time earnings — on top of the salary into a complying fund. The salary is a deductible expense for the company, which reduces taxable profit.
A dividend, by contrast, is a distribution of after-tax profit. No PAYG withholding or super applies to dividends. Franking credits can attach to them, reflecting the company tax already paid, which reduces the director's personal tax liability on that income. Dividends are not deductible for the company.
Neither approach is universally better. The right mix depends on the company's profitability, the director's other income, and how much flexibility is needed from year to year. Most owner-directors use a combination.
PAYG withholding on director salaries
If you pay yourself a salary as a director, you must register for PAYG withholding and treat yourself like any other employee for tax purposes. That means applying the correct withholding rate based on your income level using the ATO's tax tables, accounting for the Medicare levy, and deducting any HECS/HELP repayments if a debt exists.
Income tax in Australia is progressive, so the rate rises with income. Withholding amounts are calculated per pay period and remitted to the ATO on your regular activity statement cycle — monthly or quarterly depending on your withholding volume.
One practical point: directors have more flexibility than ordinary employees around timing. A director can resolve to set a salary level at the start of the financial year and draw it across the year, or draw amounts periodically with withholding applied each time. What you cannot do is ignore withholding altogether and settle up at tax time — the obligation to withhold and remit arises at each payment.
Superannuation obligations for directors
A company must pay super on a director's salary at the same 12% rate that applies to any employee. This applies even if the director is also a shareholder. The payment must go to a complying superannuation fund — which can be a self-managed super fund if the director has one — by the quarterly due dates.
Missing the super deadline removes the company's tax deduction for that contribution and triggers the Superannuation Guarantee Charge, which adds interest and an administration levy. Directors can also be held personally liable for unpaid super under certain circumstances, which is worth keeping in mind if the company is under financial pressure.
No super is payable on dividends, on amounts paid under a genuine contractor arrangement, or on drawings that are characterised as loans rather than salary.
Single Touch Payroll and year-end reporting
Director salaries must be reported through Single Touch Payroll (STP). Every time you process a pay run — whether that is weekly, fortnightly or monthly — the salary, PAYG withholding and super information is reported to the ATO at that pay event. There is no separate annual return for employees; STP replaces that.
At the end of the financial year, the company must finalise the director's income statement in STP by 14 July. This replaces the old payment summary and allows the director to lodge their personal income tax return with pre-filled data.
If you operate payroll for other staff as well as yourself, this is no different from any other payroll finalisation. If you are the only person on payroll, it still applies — STP obligations do not have a minimum headcount.
For a broader view of how STP works across a multi-entity or multi-country structure, see how Mellow runs payroll across six countries.
Loans and Division 7A
A common mistake owner-directors make is taking money out of the company informally — as drawings or loans — without documenting them properly. The ATO's Division 7A rules treat certain loans, payments and forgiven debts from a private company to a shareholder or associate as unfranked dividends, making them taxable income in the year they are received.
If you need to access company funds outside of a formal salary or dividend, any loan must be set up under a complying loan agreement with a minimum interest rate and a repayment schedule. Failing to do this before the company's tax return is lodged can create an unexpected and unfranked income inclusion that is often more expensive than simply paying yourself correctly in the first place.
Getting the structure right from the start — and keeping salary, super and loan arrangements clearly documented — avoids the most common and costly mistakes directors make in managing their own pay.
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