Camden Professionals

Benefits, Tax Advantages and Common Traps to Avoid with company structures

A proprietary limited company (Pty Ltd) is one of the most popular business structures in Australia but it comes with both advantages and compliance responsibilities. Understanding how a Pty Ltd company works, particularly around tax, asset protection, credibility and succession, is essential before deciding whether it’s right for your business.

Compliance and Legal Requirements for Pty Ltd Companies

All Pty Ltd companies must comply with the Corporations Act 2001, including:

Registering for an Australian Company Number (ACN)
Appointing at least one Australian-resident director
Having 1–50 non-employee shareholders
Lodging required documents (company constitution, annual statements) with ASIC
Maintaining accurate financial records

Large proprietary companies (based on revenue, assets, or employee thresholds) must lodge audited financial statements with ASIC. Small proprietary companies have fewer obligations but may still be required to provide audited accounts if ASIC requests them or shareholders holding at least 5% of voting shares demand it.

Tax Efficiency and Profit Reinvestment Benefits

Most small Pty Ltd companies that qualify as base rate entities pay a 25% corporate tax rate, compared to personal tax rates of up to 45%.

The real benefit lies in reinvesting profits.

Example:
Daniel, a Brisbane electrician, was earning $240,000 as a sole trader. Every dollar above $190,000 was taxed at 45%. After switching to a Pty Ltd company, he paid 25% company tax and reinvested retained profits into vehicles and apprentices—saving around $45,000 in tax over two years.

Higher personal tax only applies when profits are withdrawn as wages or dividends.

Business Credibility, Branding and Finance Access

Operating as a Pty Ltd company signals professionalism and stability. Banks, suppliers and corporate clients often prefer dealing with incorporated businesses.

Example:
A Melbourne-based construction business struggled to win commercial contracts as a sole trader. After incorporating, they began qualifying for tenders that previously excluded non-company structures.

Control, Privacy and Staying Private

Pty Ltd companies are privately owned, not listed on public markets. This means:

Tight control among shareholders
No public disclosure of strategies or margins
No pressure from public investors

Example:
A family-owned food manufacturer in regional NSW declined offers to list publicly, choosing to remain a private company to protect confidentiality and retain full decision-making control.

Succession, Sale and Exit Planning Advantages

A Pty Ltd company has perpetual succession, meaning it continues even if owners retire or pass away. Ownership can be transferred easily through share sales or gifting, making succession and exits simpler than for sole traders.

Example:
Mark, a software consultant, restructured into a Pty Ltd company five years before selling. Buyers were able to acquire shares rather than renegotiate contracts—making the business far more attractive.

Common Drawbacks and Pty Ltd Traps

Higher Costs and Compliance

ASIC registration and annual fees
Separate company tax returns
Payroll, bookkeeping and governance obligations

For very small or low-risk businesses, this can outweigh the benefits.

Division 7A and “It’s Not Your Money”

Company funds belong to the company—not you personally. Improper withdrawals can trigger Division 7A, where the ATO treats them as loans or unfranked dividends.

Personal Services Income (PSI) Rules

If income mainly comes from your personal labour (common for consultants and freelancers), PSI rules may remove most tax advantages of a company structure.

Pty Ltd vs Sole Trader: Quick Comparison

Feature	Sole Trader	Pty Ltd Company
Legal status	Same as owner	Separate legal entity
Liability	Unlimited	Limited to company assets*
Tax rate	Up to 45%	25% (base rate entities)
Access to money	Immediate	Wages/dividends only
Setup cost	Low	Higher (ASIC + advice)
Admin	Simple	More complex

*Directors may still be liable under guarantees or breaches.

When a Pty Ltd Structure Makes Sense

A Pty Ltd company is often appropriate when you:

Earn $120k–$150k+ in annual profit
Employ staff or subcontractors
Operate in higher-risk industries (e.g. construction)
Need credibility for larger contracts
Plan for succession or eventual sale

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How can we help?

If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au or arrange a time for a meeting so we can discuss your requirements in more detail.

General Advice Warning

The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.

Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.

Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Camden Professionals, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.

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Have you received a Director Penalty Notice? Here’s What You Need to Do

Running a business facing insolvency can be overwhelming, often leading owners to avoid confronting mounting challenges. This pressure creates a cycle of hope and denial, with phrases like “if we can just…” echoing until all options seem exhausted, prompting a delayed search for advice.

Unfortunately, this cycle can last longer than necessary. Many business owners reveal they have received a Director Penalty Notice (DPN) from the ATO, often long after it was issued. Common reasons for receiving a DPN include:

Not engaging with the ATO regarding outstanding debts.
Lacking an active payment arrangement.
Having tax debts over $100,000.
Owing superannuation guarantee amounts.

DPNs come in two types: “lockdown DPNs,” which hold you personally liable for tax debts, and “non-lockdown DPNs,” which give you 21 days to act. With ASIC reporting a 36.2% year-on-year increase in corporate insolvencies, the risk of personal insolvency is rising, especially as the ATO intensifies its debt recovery efforts.

What to Do If You Receive a DPN

Ignoring a DPN is not an option. Here are steps you can take:

Develop a Business Debt Strategy: Work with your advisor to create a strategy for addressing your business debt. This might involve negotiating with creditors, streamlining operations, selling non-core assets, or exploring funding options. If administration becomes necessary, your advisor may step in to manage the business. In cases of insolvency, you may need to appoint registered liquidators to wind up the business and negotiate with creditors.
Address Personal Debt: Actions taken to stabilize your business can sometimes render a non-lockdown DPN ineffective if tax debts are settled and the business recovers. However, if you have received a lockdown DPN and proceed to liquidation, remember that the DPN remains in effect. The ATO cannot act during liquidation, but they will likely pursue the debt afterward.

Act Now

Receiving a lockdown DPN means that your business’s financial problems are now personal issues. While your advisor may not be able to address both simultaneously, they should take a holistic approach to ensure you have a clear understanding of your entire situation.

If your business is on the brink of insolvency, seek advice immediately. At Camden Professionals, even if we aren’t the best fit for your needs, we can recommend other resources that may be more suitable. This is especially crucial if you’ve received a non-lockdown DPN, as timely advice can help you avoid personal liability for business debts.

If you have a lockdown DPN or are dealing with a DPN related to a business that was wound up in the past, it’s time to confront the issue head-on. As the ATO intensifies its debt recovery efforts, delaying resolution will only diminish your ability to manage the debt on your terms. Don’t wait—take action now.

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How business owners should deal with company funds or money

When you start up a business, inevitably, it consumes not only large amounts of your time of but also a lot of cash and much of this is money you have already paid tax on. So, it only seems fair that when the business is up and running the business can pay you back. Right?

There are a myriad of ways business owners look for payback from a company they have invested their time and money into it, from dividends, salary and wages, jobs for sometimes underqualified family members to cash advances and personal expenses like school fees and entertainment charged as company expenses. But, once the cash is in the company, it is company money.

In this article we look at the flow of money in and out of a company and the problems that trip business owners up.

Repayment of company loans

If you have lent money to your company, you can draw this money back out as a loan repayment.

The loan repayment is not deductible to the company, but any interest payments made to you will be tax deductible if the borrowed money has been used in the company’s business activities (assuming interest has actually been charged on the loan).

Conversely, any repayments made by the company on the loan principal are not regarded as income for tax purposes, but you will need to declare any interest earned in your income tax return. All loans, including the loan term and repayments, should be documented.

Dividends: Paying out profits

Dividends basically represent company profits that are paid out to the shareholders of a company. If the company has franking credits from income tax it has paid, the dividends might be franked, and the credits can often be used by the shareholder to reduce their personal tax liability.

When a dividend is paid by a private company it must provide a distribution statement to the shareholders within four months after the end of the financial year. This gives private companies up to four months after the end of the financial year to work out the extent to which dividends will be franked.

If any of the shares in the company are held by a discretionary trust then there are some additional issues that will need to be considered, including whether the trust has a positive amount of net income for the year, whether the trust has made a family trust election for tax purposes and who will become entitled to distributions made by the trust for that year.

Repaying share capital

Many private companies are set up with a relatively small amount of share capital. However, if a company has a larger share capital balance, then there might be scope for the company to undertake a return of share capital to the shareholders.

Whether this is possible will depend on the terms of the company constitution and there are some corporate law issues that need to be addressed. From a tax perspective, a return of share capital will normally reduce the cost base of the shares for CGT purposes, which means that a larger capital gain could arise on future sale of the shares but there won’t necessarily be an immediate tax liability.

There are some integrity rules in the tax system that need to be considered. The risk of these rules being triggered tends to be higher if the company has retained profits that could be paid out as dividends.

Shareholder loans, payments and forgiven debts: Division 7A Rules

There are some rules in the tax law (known as Division 7A) that determine how money taken out of a company is treated. Division 7A is a particularly tricky piece of tax law designed to prevent business owners accessing funds in a way that circumvents income tax.

While amounts taken from a company bank account by the owners are often debited to a shareholder’s loan account in the financial statements, Division 7A ensures that any payments, loans, or forgiven debts are treated as if they were dividends for tax purposes unless there is a loan agreement in place which meets certain strict requirements. These ‘deemed’ dividends cannot normally be franked.

Loan Agreements

If you have taken money out of the company bank account, then the main ways of avoiding this deemed dividend from being triggered are to ensure that the loan is fully repaid or placed under a complying loan agreement before the earlier of the due date and actual lodgement date of the company’s tax return for that year.

To be a complying loan agreement the agreement requires minimum annual repayments to be made over a set period of time and there is a minimum benchmark interest rate that applies – currently 4.77% for 2022-23.

For example, if your company is paying school fees for your kids, or you take money out of the company bank account to pay down your personal home loan, if you don’t pay back this amount or put a complying loan agreement in place then this amount is likely to be treated as a deemed unfranked dividend.

That is, you need to declare this amount in your personal income tax return as if it was a dividend and without the benefit of any franking credits. This means that even though the company might have already paid tax on this amount, you will be taxed on it again without the ability to claim a credit for the tax already paid by the company (causing double taxation of the same company profits).

The rules are very strict when it comes to loan repayments. If a repayment is made but the same amount or more is loaned to the shareholder shortly afterwards then there are some special rules that can apply to basically ignore the repayment. There are some exceptions to these rules and the position needs to be managed carefully to avoid adverse tax implications.

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What does Division 7A rules mean for company directors?

An area that often gets small and medium sized private companies into hot water is the blurred line between the company’s money and the owner’s money. This is an area taxpayers often tend to get wrong and the ATO pays particular attention each year to this issue.

Division 7A explained.

A payment or other benefit provided by a private company to a shareholder or their associate can be treated as a dividend for income tax purposes under Division 7A even if the participants treat it as some other form of transaction such as a loan, advance, gift or writing off a debt.

Division 7A can also apply when a private company provides a payment or benefit to a shareholder or associate through another entity, or if a trust has allocated income to a private company but has not actually paid it, and the trust has provided a payment or benefit to the company’s shareholder or their associate.

Division 7A is part of the Income Tax Assessment Act 1936 and is intended to prevent profits or assets being provided to shareholders or their associates tax free.

Where a company makes a payment to shareholders* that payment would normally be treated as a franked dividend. In some cases companies may make loans to directors subject to a formal loan agreement. In many cases directors simply take money out of their private company without treating it as either a dividend or a loan.

Where that happens and the situation isn’t rectified, the ATO will take an interest and will look to treat such payments (or loans) as unfranked dividends, which is an undesirable outcome for both company and shareholder.

*The ATO treats the definition of a shareholder to include the associates of the shareholder, including spouse, children and business partners.

What transactions are flagged by the ATO?

When applying the Division 7A Rules, the ATO will pay attention to the following:

Paying private expenses out of company funds
Lending company funds to shareholders without a loan agreement, possibly at no interest or a reduced interest rate
Giving private use of company assets for free or at less than market value (such as a home owned within the company or a boat). In this case, the unfranked dividend is equal to the arms-length rental amount normally paid less any rental amount actually paid.
Unpaid present entitlement issues, if the company is a beneficiary of a family trust, arising where a trust makes the company entitled to a distribution of income but doesn’t actually pay it. Instead the funds are retained within the trust, which therefore has continued use of the money until the company finally calls for the UPE to be paid (which sometimes never happens).

Division 7A only applies where a payment or loan is not repaid by the company’s tax return lodgement date (the earlier of the day on which the company lodges its tax return, or its due date for lodgement).

Create a Complying Loan Agreement

If your company is in a position where you may have breached the Division 7A rules, you can take steps prior to lodging your company tax return by ensuring that any money that any shareholder (or their associate) borrowed or otherwise received from the company during the year is either repaid or offset against other amounts owed by the company (for example, salary, wages or directors fees) or, alternatively, put in place a complying loan agreement. It is important that you consult with your accountant to put in place a loan agreement that includes the following features:

The loan agreement must be in writing and;
should identify the names of the lender and borrower
should set out the essential conditions of the loan, including:
the amount of the loan
the requirement to repay the loan
interest rate payable (which must be at least the benchmark interest rate set by the ATO)
the term of the loan
must be signed and dated before lodging the income tax return.

There are 2 types of complying Division 7A loan agreements:

An unsecured loan, which has a maximum term of 7 years; or
A secured loan, secured by a mortgage over real property (where the market value of the property is at least 110% of the loan amount), which has a maximum term of 25 years.

If you don’t rectify the situation before the company’s lodgement date, Division 7A will deem the company to have paid an unfranked dividend to that shareholder, which must be declared in the recipient’s tax return (which won’t be entitled to a tax credit) and will be taxed at the top marginal rate of 45%.

The amount of that dividend is deemed to be equal to the lesser of the amount that’s actually paid to the shareholder or their associate, or an amount which is called the company’s distributable surplus (which is basically its net assets less paid-up share capital).

Future changes to Division 7A Rules

The government is proposing to change the rules so that there will only be one type of complying loan agreement, consisting of:

a 10-year unsecured loan (which is bad news if you currently have a 25-year secured loan, as you will have to pay the loan off far faster than you thought),
interest rates on Division 7A loans rising by approximately 2%,
a change in the way minimum yearly repayments are calculated,
the “distributable surplus” rule to be abolished.

No start date has been set for the changes to Division 7A so you don’t need to take action.

Important Notes

There are some common traps to avoid.

If you enter in a 25 year mortgage, ensure that you register a mortgage prior to lodging your tax return
Ensure that your keep records of the amounts lent and paid so that you have accurate balances of Division 7A loans at any point in time
Pay your loan repayments on time to comply with your loan agreement

The ATO has developed a useful Division 7A calculator and decision tool which will assist you to comply with the rules. You can access the tool here: https://www.ato.gov.au/calculators-and-tools/division-7a-calculator-and-decision-tool/

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Frequently Asked Questions

Benefits, Tax Advantages and Common Traps to Avoid with company structures

Have you received a Director Penalty Notice? Here’s What You Need to Do

How business owners should deal with company funds or money

What does Division 7A rules mean for company directors?