Should Law Firm Owners Pay Themselves Salary or Dividends?
- Mar 23
- 2 min read
Should Law Firm Owners Pay Themselves Salary or Dividends?
For law firm owners in Queensland operating through a company (Pty Ltd), one of the most common questions is:
“Should I pay myself a salary, dividends, or both?”
The answer isn’t purely tax driven, it’s about structuring your income in a way that balances cash flow, compliance and long term wealth creation.
1. Salary (Director/Employee Wages)
Pros
Provides regular, predictable income
Superannuation contributions are made
Improves borrowing capacity (lenders prefer payslips)
Reduces company taxable profit
Cons
Taxed at individual marginal tax rates
PAYG withholding obligations apply
Less flexibility in timing
2. Dividends
Pros
Can be tax effective with franking credits
Flexibility in timing of payments
No superannuation required
Cons
Only paid from after tax profits
No guaranteed cash flow
Still taxed personally (with franking credits attached)
️What Most Law Firm Owners Do
In practice, a hybrid approach is usually the most effective:
Pay a base salary to cover living costs, meet compliance obligations and support lending capacity
Distribute dividends when the firm generates surplus profits
This approach balances:
Cash flow stability
Tax efficiency
Superannuation accumulation
Example
Salary: $120,000 (plus super)
Company profit: $200,000
The company pays tax (25% or 30%), and the remaining profit is distributed as franked dividends.
Result: consistent income during the year, with tax effective distributions when profits allow.
Key Tax Considerations for Queensland Lawyers
Personal Services Income (PSI)
Many law firms fall under PSI rules because income is generated primarily from the owner’s personal effort and expertise.
This can:
Limit income splitting opportunities
Affect how profits are taxed
“Reasonable Salary” Expectations
The ATO expects business owners to pay themselves a commercially reasonable salary before relying heavily on dividends. Failing to do so may attract scrutiny.
Division 7A Risks
If you take money out of the company without declaring it properly as salary or dividends, Division 7A may apply, potentially treating those amounts as unfranked dividends.
Superannuation Planning
Salary requires super contributions
Dividends do not require super contributions
Relying solely on dividends can mean missing out on long term retirement savings.
Dividend Compliance
Dividends must:
Be paid from retained earnings
Be properly declared with supporting documentation
Pass solvency requirements
Why Structure Matters More in Queensland
While tax rules are federal, Queensland specific factors often influence decisions:
Strong property market lead to lenders preferring stable PAYG income
Professional services firms often fall within PSI
Many firms operate as small to mid sized practices where cash flow stability is critical
The Strategic Approach
For most law firm owners, the optimal structure looks like this:
Pay yourself a market based salary Ensure superannuation is funded Distribute profits via franked dividends Review the mix annually with your adviser
How Rise Accountants Can Help
At Rise Accountants, we support Queensland law firm owners with:
Structuring the optimal mix of salary and dividends for tax efficiency
Managing superannuation obligations and long term wealth planning
Advising on Personal Services Income (PSI) implications
Navigating Division 7A risks
Ensuring dividend compliance (retained earnings, documentation, solvency)
Improving cash flow planning and income consistency
Setting up the right structure to support profit and growth
Providing proactive, ongoing advice as your firm grows and evolves