We find a lot of confusion around the term Drawings about what implications taking drawings has for you as a business owner.
Distinction between Drawings and Wages
Drawings is a general term that relates to how much money you have taken from the business, but technically it can be only be used when you are operating as a sole trader or in a partnership. If you operate your business in a company or trust structure, you do not have drawings.
Drawings means that you are withdrawing a portion of the profit that the business has generated.
In contrast, paying yourself wages is done as remuneration for an employment arrangement between you and your business. That might sound quite technical, but taking wages from your business is no different to being employed by any third party. You get paid for performing certain tasks and jobs for your business.
Wages – Can only happen when there is a separate entity such as a company or trust involved. You cannot pay yourself wages as a sole trader or partnership.
Drawings – Only happens in s a sole trader or partnership. You cannot have drawings from a company or trust.
Another key difference between drawings and wages is that when wages are paid, it is the employer’s responsibility to withhold tax on the wages and pay superannuation where appropriate.
Drawings and Taxation
When you are operating as a sole trader or partnership, you are not taxed on the amount of drawings you take. Your tax is calculated based on the profit you generate in the business. How much of that profit you withdraw from the business as drawings is irrelevant from a taxation perspective.
However, if you are taking wages, the amount you take is directly assessable to you as taxable income.
Creating a plan for Drawings
We encourage business owners to take drawings or wages, according to a financial plan that has been created up as a part of your overall business plan. Profit from a business needs to be allocated in a strategic way, both to provide for the lifestyle of the owners and also to allow for the future plans of the business.
Time and again we deal with business owners who have incurred tax or GST debts because they haven’t been taking money out of the business in a structured way.
If you don’t have a financial plan or general business plan for your business, regardless of the size and complexity of your operation, contact us and find out how we can help.