Dividends warriors will attest that it is true. Business Owners who declare dividends instead of drawing a salary likewise might think so too.
The reality is that before a company can declare Dividends, they must first have retained profits, the profit will be taxed at the prevailing corporate tax rate (This is different from GST), before the profit net of tax can be added to the company’s retained profits, thereafter it could be declared as Dividend.
Listed companies or mutual funds that pay out dividends generally incur a higher costs compared to those that do not. The alternative would be capital gain asset classes.
For a Business Owners who opt to collect dividends instead of a salary from their own companies, you have essentially been paying the prevailing corporate tax rate instead of the personal tax rate.
This might cause difficulties when you seek to increase your Insurance Coverage or acquire Financing Loans for Assets.
There are many available options and legitimate ways to pay yourself a salary and reduce your payable tax.
Consider the following Scenarios:
Company makes $312,240 Profit before Tax in YA2020
Option A - 40 YO Director takes Dividends
Option B - 40 YO Director takes Salary
Option C - Combination of A & B
In summary, the business owner would have paid less tax if he has declared part of his company’s earning as a salary to himself, compared to full dividends.
I will be writing more about the benefits of contributing CPFs in future articles. Stay tuned!
* * * * * *
Trust Garry’s insight and expertise to grow your money with assurance. Click here to find out more…
Strategic financial planning to secure and double your wealth within 10 years.
* * * * * *