Money withdrawn from a business is not necessarily profit

One of the major differences between operating as a company, as compared with operating as a sole trader, in a partnership, or through a family trust, is the way that money withdrawn from the business is counted as income in the hands of the owners.

There is a general misconception that business owners must pay tax on any money they take out of the business. In fact, apart from a business operated through a company, money withdrawn from a business does not result in it being classed as taxable income of the owners.

The taxable income of a business when it is operated as a sole trader, or in a partnership of individuals, is the net profit of that business. When a sole trader or members of a partnership take money out of the business this is classed as drawings, and is effectively cash taken in anticipation of a profit being made.

If a business is operated through a family trust the owners, the family beneficiaries of the trust, pay tax on the amount of income distributed to them from the profits made by the business. In this situation beneficiaries can take loans or drawings out of the business in anticipation of future profits. Read more

Max Newnham - Brisbane Times - 18 July 2017