What was broken
A five-year-old IT services company had grown to annual revenue at a meaningful scale and was solidly profitable, but the promoters were paying materially more tax than the business needed to. The legal and tax structure had never been revisited as the company grew — director remuneration, dividend distribution and operational expenses were not aligned with any long-term tax plan, and the mismatch produced unnecessary tax leakage every financial year.
What we did
CapEasy reviewed the company's financial structure, promoter remuneration, cash flow and tax position end to end. The compensation framework was redesigned, the mix between salaries and dividends optimised, expense allocation recommendations made, and a more efficient corporate structure implemented — all inside the corporate and tax law framework the company was already operating under.
Where it landed
The restructuring produced a substantial reduction in the company's annual tax outflow while keeping it fully compliant. The promoters gained a clear framework for future profit distribution and long-term financial planning, freeing additional capital to reinvest into business expansion.
Why "optimise the salary/dividend mix" needs a permission slip first
The engagement's core move — redesign director remuneration, rebalance salary against dividends, tidy the structure around it — is a completely different exercise for an Australian services company than for a business selling a product. Personal services income (PSI) rules under Part 2-42 of the Income Tax Assessment Act 1997 exist specifically to stop an individual from routing income earned substantially through their own labour or skills through a company or trust purely to access a lower entity tax rate and split it with associates. If the income a services company bills is caught as PSI and the company cannot show it runs a genuine personal services business, the income is attributed back to the individual who actually performed the work — taxed at their marginal rate, with most business deductions unavailable at the entity level — regardless of what the company's books, dividends or director loan account say.
That is the gate a services company's restructure has to clear before the salary/dividend optimisation this engagement is built around even applies. Get the attribution question wrong and a rebuilt compensation framework does not reduce tax outflow — it produces a structure the ATO can unwind on review, with the individual taxed as if the company never existed for that income.
The tests a margin-by-client ledger already has the answer to
Whether income is caught as PSI, and whether the company can self-assess out of attribution, turns on a set of tests set out in Division 87 of the same Act: the results test (paid for a result, using your own equipment, liable to fix defects at your own cost), the unrelated clients test (services offered to the public and provided to two or more clients not connected to each other), the employment test (20% or more of the work, by market value, performed by others), and the business premises test (separate, dedicated premises). A company that derives 80% or more of its PSI from one client in a year cannot self-assess against the unrelated clients, employment or business premises tests at all — it must pass the results test outright, or apply to the Commissioner for a personal services business determination, per the ATO's guidance on personal services income and Division 87 of the Income Tax Assessment Act 1997.
A margin-by-client book is precisely the artefact that answers the question the 80% rule and the unrelated clients test are asking: how concentrated is the revenue, client by client, and does the pattern of engagements look like a business serving a market or a single arrangement wearing a corporate structure. Built for margin analysis, that same client-level ledger tells the registered tax agent, before restructuring the compensation framework, which side of the PSI line the company sits on — and whether the redesign this case study describes is even available to it in its current form.
Once the PSI gate clears, Division 7A takes over the drawings
A company that passes the PSI test and legitimately retains profit inside the entity still has to move money to its director on documented terms. A payment, loan or forgiven debt from a private company to a shareholder or their associate that is not a properly declared wage or dividend can be treated as an unfranked dividend under Division 7A of the Income Tax Assessment Act 1936 — taxed at the recipient's marginal rate with no franking credit to offset it. A director loan left undocumented past the company's lodgment day is deemed a dividend for that year regardless of what gets tidied up afterwards; a complying loan agreement under section 109N needs a written term, a maximum duration and interest charged at or above the ATO's benchmark interest rate, published annually on the ATO's Division 7A benchmark interest rate page and checked at the time the loan agreement is drawn up, not assumed from a prior year.
This is the same discipline the earlier engagement applied when it aligned director remuneration with long-term planning instead of ad hoc drawings — the Australian version just runs through a named statutory mechanism with a hard annual deadline attached.
The register that has to agree with the plan
A restructured compensation framework also has to survive ASIC's annual review, which requires the company's directors to resolve, within two months of the review date, that the company can pay its debts as they fall due — a solvency call that depends on current, reconciled books rather than a plan drawn up once and filed away. A margin-by-client ledger and a reconciled director loan account are what let that resolution, and the registered tax agent's PSI and Division 7A determinations, be made from real numbers rather than a reconstruction under time pressure.
CapEasy's part in this is the ledger: the margin-by-client books, the reconciled director loan account, and management accounts current enough to support a solvency resolution on the day it is due. Whether the company passes a personal services business test, how a director loan should be structured, and what the ASIC solvency resolution should say are calls for your registered BAS or tax agent — everything here is prepared for that agent to lodge, not a substitute for their determination.
What to take from it
- A services company cannot optimise its salary/dividend mix until it knows whether its income is even attributable to the company — PSI rules answer that question first.
- The 80% rule is a hard gate, not a judgement call: one client above that share of revenue rules out self-assessing the unrelated clients, employment and business premises tests entirely.
- A margin-by-client ledger built for margin analysis is the same artefact a PSI determination needs — client concentration, by name, over time.
- Clearing the PSI gate does not end the discipline: drawings still route through Division 7A, with a complying loan agreement due by lodgment day, not year end.
- ASIC's annual solvency resolution depends on the same reconciled books as the tax position — a restructure plan and the ledger behind it have to agree.