The Gap Between Starting a Company and Running One Properly
Every year, tens of thousands of Australian small business owners incorporate — drawn by the 25% company tax rate, limited liability protection, and the credibility of trading as a Pty Ltd. The ASIC registration process takes minutes online. The consequences of doing it wrong unfold over years.
The gap isn't between choosing a company structure and not choosing one. The gap is between incorporating and actually understanding what that structure requires of you — as a director, as a shareholder, and as a taxpayer.
A company is not a tax-free piggy bank. It is not an extension of your personal finances. It is a separate legal entity with its own obligations, its own tax file number, its own compliance calendar, and its own set of rules governing how money flows between the business and the people who own and run it.
This guide covers what running an Australian Pty Ltd actually requires: the tax rates, the payroll obligations, the annual compliance calendar, and the provision of tax law — Division 7A — that generates more unexpected tax bills for Australian company directors than almost anything else in the system.
The Company Tax Rate Advantage: What It Is and What It Isn't
The primary tax reason most Australian business owners incorporate is the company tax rate. For base rate entities — companies with aggregated turnover under $50 million and no more than 80% of assessable income from passive sources — the flat company tax rate is 25% for the 2025–26 financial year.
Compare this to individual marginal tax rates:
Taxable IncomeIndividual Rate+ Medicare LevyEffective Top Rate$0 – $18,2000%—0%$18,201 – $45,00016%2%18%$45,001 – $135,00030%2%32%$135,001 – $190,00037%2%39%$190,001+45%2%47%
A sole trader earning $150,000 in business profit pays approximately $40,567 in income tax plus $3,000 Medicare levy — an effective rate of around 29%. That same profit earned through a base rate company is taxed at a flat 25%, saving approximately $6,000 per year on retained earnings.
But here is the critical nuance that most explanations skip: the 25% rate only applies to profits retained inside the company. The moment you extract those profits — as salary, as dividends, as director fees — they are taxed again at your personal marginal rate. The company tax rate is not a tax reduction on your personal income. It is a deferral and a rate advantage on money that stays in the business.
This is where the real planning happens: structuring how you pay yourself from the company to minimise your overall tax position while keeping the business funded and ATO-compliant.
The Break-Even Point
Incorporating too early adds cost and compliance for no benefit. Incorporating too late means you have been paying more tax than you needed to, and carrying personal liability you could have avoided.
The inflection point for most service businesses — accounting for ASIC fees, a company tax return, and the additional bookkeeping complexity — is typically around $100,000 to $120,000 in annual business profit. Below that level, the tax saving is often absorbed by the additional compliance cost. Above it, the saving compounds meaningfully year on year.
For businesses with significant liability exposure — construction, trades, professional services with indemnity risk — the liability protection argument may justify incorporation below the tax break-even point.
How to Pay Yourself From Your Own Company: The Three Legal Methods
This is the question that causes more confusion — and more Division 7A breaches — than any other aspect of running a company. Because a company is a separate legal entity, you cannot simply transfer money from the company account to your personal account whenever you feel like it. There are three legal methods:
1. Salary or Wages
You employ yourself as a director-employee and pay yourself a salary. The company claims the salary as a tax deduction. You receive the salary as assessable income, subject to PAYG withholding and superannuation (from 1 July 2025 at 12% of ordinary time earnings).
This is the most straightforward extraction method and the most common for directors who work full-time in their business. It creates a predictable personal tax position and keeps the company's books clean.
The super obligation matters. From 1 July 2026, super must reach your fund within 7 business days of every payday under Payday Super. Directors who pay themselves a salary are employees for super purposes, and the same Payday Super rules apply.
2. Dividends
The company distributes after-tax profits to shareholders as dividends. Dividends come with franking credits representing the company tax already paid — preventing double taxation. A shareholder receiving a $7,500 dividend from a company that paid 25% tax attaches a $2,500 franking credit, grossing up the dividend to $10,000 for tax purposes. The shareholder pays tax on $10,000 at their marginal rate, then offsets the $2,500 credit.
For shareholders on marginal rates below 25%, this creates a franking credit refund — they pay less personal tax than the franking credit represents, and the ATO refunds the difference.
Dividends require a resolution of directors and must be paid from distributable surplus. They cannot be paid if the company is insolvent or has no retained profits.
3. Director Fees
Director fees are a payment for the performance of director duties, separate from an employment salary. They are deductible for the company and assessable income for the director. For tax and super purposes, director fees trigger the same PAYG and superannuation obligations as salary. They are less commonly used than salary or dividends but can be appropriate in specific structuring contexts.
What Is Not a Legal Method: The Director Loan Trap
The fourth way money leaves a company — and the most dangerous — is the informal director loan. A director who transfers money from the company account to their personal account without a salary, dividend resolution, or complying loan agreement has triggered Division 7A.
Division 7A: The Tax Provision That Catches More Directors Than Any Other
Division 7A of the Income Tax Assessment Act 1936 is an anti-avoidance measure designed to prevent private companies from distributing profits to shareholders tax-free through loans, payments, or forgiven debts. In 2026, with higher benchmark interest rates and sharper ATO scrutiny, it has become the most consistent source of unexpected tax bills for Australian company directors.
The core risk is straightforward: if your company lends money to a director or shareholder without proper documentation, a complying repayment schedule, and the correct interest rate, the ATO can treat that loan as a taxable dividend. A taxable dividend without franking credits. Taxed at your full marginal rate — up to 47% including Medicare levy.
What Triggers Division 7A
Division 7A applies to:
Loans. Any amount lent by the company to a shareholder or their associate — including informal transfers to a director's personal account — without a complying written loan agreement in place before the company's lodgement date.
Payments. Any payment by the company on behalf of a shareholder that is not salary, wages, or a legitimate business expense. A company paying a director's personal credit card bill, school fees, home mortgage, personal insurance, or private holiday is making a payment that may be deemed a dividend under Division 7A. The director's intent is irrelevant — the character of the payment is what matters.
Debt forgiveness. If the company writes off or forgives a loan owed by a shareholder, the forgiven amount is treated as a deemed dividend. Directors sometimes treat forgiveness as a clean exit from an outstanding director loan balance. It is not — it converts the loan problem into a different but equally taxable problem.
Private use of company assets. A company that owns a vehicle, boat, or property used by a shareholder or director for private purposes may trigger Division 7A on the value of that private use, even if the asset was purchased for legitimate business purposes.
Interposed entities. Division 7A can trace loans made through trusts or other entities back to the original company where a shareholder or their associate is the ultimate beneficiary. A director who borrows from a trust that has itself borrowed from the company cannot sidestep Division 7A by inserting the additional entity.
Who Is an "Associate"?
Division 7A applies not just to shareholders but to their associates — a definition the ATO applies broadly. For an individual shareholder, associates include spouses, children, relatives, companies they control, and trusts they or their associates can benefit from. A director's spouse borrowing from the company without a complying agreement is a Division 7A issue for the director, not just the spouse.
The Complying Loan Agreement: What It Must Include
If a director needs to borrow from their company — for legitimate business or personal purposes — the loan must be formalised as a complying Division 7A loan agreement before the company's tax return lodgement date for the year the loan is made. The agreement must specify:
- The loan amount
- The interest rate — must be at or above the ATO benchmark interest rate (8.37% for the 2026 income year)
- The loan term — maximum 7 years for unsecured loans; maximum 25 years for loans secured by real property
- A minimum annual repayment schedule
Both the principal and interest minimum repayments must be made before the company's tax lodgement date each year. The ATO provides a Division 7A calculator for computing minimum yearly repayments.
The Round-Robin Repayment Trap (New in 2025–26)
Updated ATO guidance issued in August 2025 has closed a common workaround: directors who made the minimum annual repayment on a Division 7A loan by borrowing a similar amount from the same company or an associated entity to fund the repayment. These round-robin repayments can now be disregarded by the ATO, meaning the full shortfall may still be treated as a deemed dividend. Directors who have been managing Division 7A compliance through this approach need to review their arrangements urgently.
What Happens When Division 7A Is Breached
A Division 7A breach converts the non-complying loan, payment, or forgiven debt into an unfranked deemed dividend — assessable income taxed at the shareholder's marginal rate, with no franking credits to offset the liability.
For a director on the top marginal rate, a $100,000 deemed dividend generates a personal tax bill of $47,000 — on money they may have already spent, and without any of the franking credit offset that would apply to a properly declared dividend.
In addition, the ATO may impose penalties ranging from 25% to 75% of the tax shortfall, depending on whether the breach is treated as a lack of reasonable care, recklessness, or intentional disregard. If identified during an audit rather than through voluntary disclosure, the base penalty rate of 25% is less likely to be reduced.
A deemed dividend does not reduce the loan balance. The director still owes the money to the company, and the balance continues to accrue minimum repayment obligations.
How to Fix a Division 7A Problem
If a breach has already occurred, the company or director can apply to the Commissioner for discretion to disregard the deemed dividend outcome. The application must:
- Identify the nature of the mistake
- Explain how and why it occurred
- Provide evidence that the parties acted honestly and in good faith
- Outline exactly how the error has been or will be corrected
Early engagement carries significant weight. Waiting until an ATO audit commences dramatically reduces the chance of a successful discretion application and increases the likelihood of full penalties applying. Voluntary disclosure also reduces administrative penalties — the base 25% shortfall penalty can in some cases be remitted to nil for voluntary disclosures made before any compliance action.
The Company Compliance Calendar: What's Due and When
Running a company means managing a compliance calendar that doesn't exist for sole traders. Here is what needs to happen every year:
Every Pay Run
- Process payroll through STP-compliant software
- Withhold PAYG at the correct rate and remit with each BAS
- From 1 July 2026: pay super within 7 business days of every payday (Payday Super)
Monthly or Quarterly
- Lodge and pay BAS (GST, PAYG withholding, PAYG instalments)
- Review director loan balances — check whether any informal transfers need to be formalised before they become Division 7A issues
Before 30 June Each Year
- Make minimum annual repayments on any Division 7A complying loan agreements
- Pay super before 30 June to ensure deductibility in that financial year
- Review trust distribution resolutions if the company is a beneficiary of a trust
By 28 August
- Lodge TPAR if the company is in a reportable industry (construction, cleaning, couriers, IT, security) and pays contractors
By 31 October (or 15 May through a tax agent)
- Lodge company income tax return
- Pay company tax liability
Every Year (ASIC)
- Pay the ASIC annual review fee — currently $329 for a proprietary company
- Confirm and update company details: registered address, directors, shareholders
- Maintain the register of members and minutes of any director resolutions
Before Tax Return Lodgement Date
- Execute and document any Division 7A complying loan agreements for loans made during the year
- Ensure all director loan accounts are accurately reflected in the company's books
What Your Company's Books Need to Reflect
This is where bookkeeping and company tax compliance converge. The accuracy of your company's accounts directly determines:
- Whether your BAS figures are correct and defensible
- Whether your company tax return reflects the right profit position
- Whether Division 7A obligations have been identified and documented
- Whether your accountant can prepare a clean, accurate company return at EOFY — or has to spend expensive hours reconstructing what should already be there
Specifically, your books need to clearly reflect:
Director loan account. Every transaction between the company and its director — salary, dividends, expense reimbursements, personal payments — should be recorded and categorised correctly. The director loan account balance tells you at any point whether there is an outstanding loan requiring a Division 7A agreement. An unreconciled director loan account is an ATO audit risk.
Payroll records. Correct PAYG withholding, super accruals, and STP data need to flow accurately from payroll into the company's accounts. Payroll errors that flow through to the BAS create mismatches the ATO's STP cross-referencing identifies quickly.
Franking account. The company's franking account records the tax paid, which determines how much of a dividend can be franked. An inaccurate franking account means dividends may be incorrectly franked — creating a compliance problem for both the company and its shareholders.
Expense coding. Every expense claimed as a company deduction must be a genuine business expense. Personal expenses run through the company — coded as business costs — are a Division 7A risk and an income tax risk simultaneously. Clean coding throughout the year means this risk is managed continuously, not discovered at tax time.
Common Company Bookkeeping Mistakes That Create Tax Problems
Treating the company account like a personal account. The company's money is not your money. Transfers to personal accounts without proper documentation are Division 7A issues. Every transaction needs a category: salary, dividend, loan repayment, or reimbursement — and it needs to be documented.
Not executing Division 7A loan agreements before lodgement date. This is the most commonly missed deadline in company bookkeeping. The agreement must be in place before the company's tax return is lodged for the year the loan was made. If your accountant files your company return in March and the loan was made in September, you have until March — not 30 June — to execute the agreement.
Underpaying minimum annual repayments. Division 7A loan repayments must include both principal and interest at the benchmark rate. Making repayments that are below the ATO's calculated minimum leaves a shortfall treated as a deemed dividend.
Using company funds to pay personal expenses without documentation. A company credit card used for a private holiday, school fees, or personal mortgage payments — without being declared as salary or a dividend — is a Division 7A trigger. The same applies to company-owned assets used privately.
Failing to maintain the company's franking account. If the company has paid tax, it needs an accurate franking account to correctly calculate the franking credits available on dividends. An unfranked dividend from a company with available franking credits is a missed opportunity — and potentially a compliance issue.
Frequently Asked Questions
Can I take money out of my company account whenever I want? No. A company is a separate legal entity, and its funds are not yours personally. You can pay yourself salary (with PAYG and super obligations), declare dividends (from after-tax profits, by resolution), or receive reimbursements for legitimate business expenses you've personally paid. Transferring money without one of these structures triggers Division 7A.
What is the Division 7A benchmark interest rate for 2026? The ATO benchmark interest rate for Division 7A complying loans for the income year ending 30 June 2026 is 8.37%. This rate must be applied to all complying Division 7A loan agreements for the 2026 income year. It has been adjusted annually as the RBA's cash rate has moved.
If I repay a director loan before the company's tax return is lodged, does Division 7A apply? If a loan is fully repaid before the company's lodgement date for the income year in which it was made, Division 7A generally does not apply. However, the ATO will scrutinise arrangements where the same amount is repaid and then re-borrowed shortly after — these round-robin repayments are now specifically addressed in ATO guidance.
Does my company need to pay me super? If you pay yourself a salary as a director-employee, the company must pay super on your behalf at 12% of ordinary time earnings. From 1 July 2026, that super must reach your fund within 7 business days of your payday under Payday Super rules.
What happens if my company can't pay its tax? As a company director, you can be personally liable for unpaid PAYG withholding and superannuation through Director Penalty Notices (DPNs). This personal liability is one of the most serious risks facing company directors with ATO arrears, and the ATO's use of DPNs has increased significantly. Engage with the ATO proactively if payment difficulties arise — payment arrangements are available and are treated far more favourably than ignoring the obligation.
Do I need a separate bookkeeper now that I have a company? Your company's compliance calendar — BAS, payroll, super, TPAR, Division 7A, franking account, company tax return — is significantly more complex than sole trader compliance. Most company directors benefit from a professional bookkeeper handling the ongoing accounts and BAS, working alongside their accountant who prepares the company return and provides strategic advice.
Getting Company Bookkeeping Right From the Start
The companies that avoid Division 7A problems, ATO compliance action, and unexpected tax bills at year-end share a common characteristic: their books are maintained by someone who understands the specific requirements of private company accounting.
Not all bookkeepers have experience with director loan accounts, Division 7A tracking, franking account maintenance, and the nuances of company payroll. It's worth asking before you engage one.
Girl Friday Australia provides bookkeeping and BAS services to Australian Pty Ltd companies — keeping books accurate, director loan accounts clean, BAS lodged on time, and your accountant's EOFY work as streamlined as possible.
✅ Registered BAS Agent ✅ Xero Certified Advisor & Gold Partner ✅ Company bookkeeping, director loan account management ✅ BAS preparation and lodgement ✅ Payroll and Payday Super compliance ✅ 20+ years experience with Australian businesses ✅ 100% remote, Australia-wide ✅ No lock-in contracts
Get a free quote or book a discovery call — and make sure your company's books say exactly what the ATO expects them to say.