How to Pay Yourself as a Trades Business Owner

Sole Trader: You Are the Business

As a sole trader, there is no legal separation between you and your business. All profit generated by the business is your personal income — and all profit is taxed at your individual marginal rate, regardless of how much you actually drew out of the account.

This is the fundamental misunderstanding that creates tax bill surprises:

• You are not paid a "wage" as a sole trader. You draw money from the business as needed — these are called owner's drawings
• There is no PAYG withholding required on your own drawings
• But you pay income tax on the net profit of the business — not on what you drew

Example: your plumbing business earns $600,000 in revenue and has $400,000 in costs. Net profit is $200,000. You drew $80,000 from the account throughout the year. You owe income tax on $200,000 — not $80,000. The other $120,000 is still sitting in the business (or was spent on equipment, or on next month's materials), but it was still your taxable income.

This is why sole traders are so often caught off guard by their tax bill at year end — particularly in growth years when revenue increases but the owner doesn't realise what the tax on that profit will be.

Sole Trader Tax Planning: Put Money Aside From Day One

The rule of thumb: set aside 25–30% of your net profit for tax. For a sole trader turning $150,000 net profit, that's $37,500–$45,000 that should not be touched — it belongs to the ATO.

Practical approach:

• Open a separate bank account labelled "Tax"
• Each time money comes in, transfer 25–30% to that account immediately
• Do not treat this money as available cash

The ATO will also put you on PAYG instalments once your income exceeds the threshold (currently $4,000 in tax payable and $1,000 in income). These are quarterly prepayments of expected tax — based on your prior year tax return. They're not optional, and missing them attracts a GIC charge. The tax account you set up will cover these.

Company Structure: Salary, Dividends, and Drawings

Operating through a company creates a legal separation between you and the business. The company is a separate taxpayer — it pays company tax (currently 25% for base rate entities with turnover under $50M) on its profit. You, as a director, access the business's money in three main ways:

1. Director's salary: You set up payroll, pay yourself a wage, withhold PAYG, and pay super on your own salary just like any other employee. The salary is deductible to the company — it reduces the company's taxable profit. You pay income tax on your personal salary through the PAYG system
2. Dividends: After the company has paid its tax, you can declare a dividend from the remaining after-tax profit. Dividends are not deductible to the company. They come with franking credits — representing the company tax already paid — which offset your personal tax liability. The combination of salary and franked dividends is what most company directors use
3. Director's loan: You take money out of the company as a loan. This must be structured correctly — see Division 7A below

The Division 7A Problem: Why Director Drawings Matter

Division 7A is the section of tax law that treats loans, payments, and forgiven debts from a private company to its shareholders (or their associates) as deemed dividends — fully taxable and unfranked — unless specific conditions are met.

In practice, this means: if you take money out of your company that isn't classified as a declared salary or dividend, and there's no formal Division 7A loan agreement in place, the ATO can treat that payment as a taxable dividend. You'd owe income tax on it with no franking credit offset.

Division 7A loans that are properly structured require:

• A written loan agreement
• Minimum annual repayments (calculated based on the loan balance and a benchmark interest rate set by the ATO each year)
• Interest charged at the ATO's benchmark rate

This is an area where your bookkeeper and accountant need to coordinate. Getting it wrong is expensive to fix — and the ATO does look for it.

What Is a Reasonable Director's Salary?

The ATO expects company directors who actively work in the business to pay themselves a salary that reflects the commercial value of their contribution. This is sometimes called the "arm's length" principle — what would you pay an employee to do the work you're doing?

For a working trades business owner who is on the tools, managing jobs, quoting, and running the business, a commercial salary is typically $80,000–$150,000 depending on trade, experience, and hours. Paying yourself $30,000 and taking the rest as dividends — when a replacement would cost $130,000 — can attract ATO scrutiny, particularly if the low salary appears designed to minimise payroll tax or super obligations.

Super on Your Own Wage

Company directors: If you pay yourself a salary, you must pay yourself super at the Superannuation Guarantee rate (12% for 2025–26). Super on your own salary is a legal obligation — you can't opt out of it. The super must be paid to a complying fund by the quarterly due dates.

Sole traders: You are not required to pay yourself super. But voluntary super contributions are one of the most tax-effective strategies available. Personal deductible contributions (up to the concessional cap of $30,000 for 2024–25) reduce your taxable income — effectively, you're diverting money from the ATO into your own retirement savings. For a sole trader on a high marginal rate, this is significant.

The Profit First Approach for Trades

Profit First (by Mike Michalowicz) is a practical cashflow management system designed to make profit non-negotiable. Instead of paying all expenses first and hoping profit is left over, you allocate income at each deposit event across separate bank accounts:

• Profit account: 5–10% of each deposit — untouchable except for quarterly distributions
• Owner's pay account: your regular draw, set as a fixed amount or percentage
• Tax account: 25–30% set aside immediately
• Operating expenses account: what's left to run the business

For trades businesses with lumpy income — large invoices paid irregularly — a modified version that accounts for periods of high material outlay works better than strict percentages. The principle remains the same: decide what you pay yourself and what you save for tax first, and operate the business on what remains.