In many family businesses, the most sensitive conversations are not about strategy. They are about people and money. Is the son who works seven days a week in the business paid enough? Should the daughter who became a doctor receive the same dividends? Can a son-in-law be made general manager? Why does one cousin have a company car?
When these questions are left unanswered, resentment builds quietly. Family members who work in the business feel undervalued. Those outside it feel shut out. In-laws are caught in between. For Chinese and Asian families, where it can be difficult to raise money questions directly with parents, the problem may go unspoken for years.
A clear family employment, pay and dividend policy does not remove every disagreement, but it replaces guesswork with agreed rules that apply to everyone.
Two different roles: working in the business and owning it
The most useful step is to separate two roles that families often blend together:
- As an employee or director, a family member is paid for the work they do. That pay should reflect the job.
- As an owner, through shares, units or as a beneficiary of a family trust, a family member receives a return on the family’s capital. That return should reflect ownership, not effort.
When the two are mixed, problems follow. A child who works in the business may be underpaid on the basis that “it will all be yours one day”, while a sibling outside the business receives equal distributions. Paying for work through wages and rewarding ownership through dividends or distributions makes each easier to explain.
Equal economics, unequal management
Equal ownership does not have to mean equal management. A family may decide that all children share equally in the economic value of the business, while only one or two of them run it. That can be fair, but only if it is deliberate:
- those who manage are paid properly for managing;
- those who do not manage receive their share through dividends or distributions, and regular information;
- decision-making rights, such as board seats and reserved matters, are set out clearly;
- everyone understands how the arrangement will be reviewed.
Economics, governance and management should be aligned on purpose rather than left to habit.
Paying family members at market rates
Paying family members what you would pay an outsider for the same role has several advantages. It is easier to defend to siblings, it means the business’s true profitability is visible, and it avoids the working family member feeling exploited or the others feeling the business is being drained.
There are legal reasons too:
- Workplace law. A family member who is genuinely an employee is generally entitled to the same minimum pay and conditions as any other employee under the applicable award or agreement, and superannuation obligations apply.
- Tax. Under the income tax law, a deduction for payments to a relative or other related entity may be limited to the amount the Commissioner considers reasonable. Paying a family member well above what the work is worth can lead to part of the payment being non-deductible. The ATO expects records of the family member’s duties, hours and pay.
- Directors’ duties. Directors who approve pay for themselves or relatives must act in the best interests of the company and manage conflicts of interest, particularly where other family members are shareholders.
Benchmarks can come from recruitment data, industry surveys or an independent adviser. Benefits such as cars, phones and housing should be included in the comparison, and may have fringe benefits tax consequences that your accountant should review.
Merit and entry rules
A family employment policy usually sets out who may work in the business and on what terms. Common provisions include:
- minimum qualifications or outside work experience before joining, often two to five years elsewhere;
- a real vacancy, rather than a role created for the family member;
- the same recruitment process and performance reviews as other staff;
- a reporting line to someone other than a parent, where possible;
- how a family member’s employment may end, and how that will be handled with dignity.
Merit rules protect the business, but they also protect the family member. Someone who has earned their position elsewhere is more likely to be respected by staff and by their siblings.
In-laws
In-laws are one of the most common sources of tension. Families take different approaches: some welcome in-laws into the business on the same merit rules as blood relatives, some exclude them from management, and some allow employment but not ownership. Whatever the choice, it should be made in advance, explained to everyone, and applied consistently. It is far harder to set a rule about a son-in-law once he is already working there.
Ownership raises separate questions. If shares or units could pass to a spouse on death or separation, the shareholders’ agreement or constitution may need transfer restrictions and buy-back options. Those protections belong in legal documents, not just the employment policy.
Dividend and distribution policy
Family members outside the business often care most about predictable returns. Family members inside it often want profits reinvested. A written dividend or distribution policy helps balance the two. It might cover:
- a target percentage of profit to be paid out, after reinvestment and reserves;
- how often distributions are made and how they are communicated;
- when the board may depart from the policy, for example in a downturn or before a major investment;
- loans to family members and how they are repaid or offset against distributions.
The law sets limits. A company may pay a dividend only if its assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment, the payment is fair and reasonable to shareholders as a whole, and it does not materially prejudice the company’s ability to pay creditors. For a discretionary trust, the trustee decides distributions under the trust deed, and a family policy can guide but not bind that discretion unless it is given legal effect. Distributions also have significant tax consequences, and the proposed 30% minimum tax on discretionary trusts from 1 July 2028 is in Bills before Parliament and is not yet law. Get advice from a qualified tax adviser before settling a policy.
Putting the policy in place
- Discuss the principles at a family meeting before writing anything.
- Agree on the separation of pay for work and returns on ownership.
- Obtain market benchmarks for each family role.
- Draft entry, pay, performance and exit rules for family employees, including in-laws.
- Draft a dividend or distribution policy with the accountant.
- Have the board formally adopt the employment and dividend policies.
- Place ownership protections in the shareholders’ agreement, constitution or trust deed.
Frequently asked questions
What should a family business employment policy include?
Entry requirements, how roles and pay are set, performance reviews, rules for in-laws, conflicts of interest and how employment ends. It should apply equally to all family members and be formally adopted by the board.
Should family members be paid market rates in a family business?
Generally yes. Market pay is easier to justify to other family members, reflects the true cost of the business, and helps with tax and workplace compliance. Ownership returns should be dealt with separately through dividends or distributions.
Can I pay my children more than other staff?
You can pay what the role justifies, but a deduction for excessive payments to relatives may be limited to a reasonable amount. Paying more as a way of giving a bigger share can also cause resentment among siblings.
Should children who don’t work in the business get dividends?
If they are owners, usually yes. Many families give all owners a fair return on capital through dividends or distributions, while paying working family members separately for their work.
How Chua Tan Associates can help
We help families design employment, pay and dividend policies that are fair, workable and consistent with their trust deeds, constitutions and shareholders’ agreements, and we facilitate the family discussions that need to come first. Justin Chua is a Nationally Accredited Mediator and an Accredited Family Business Advisor who trained in accounting, and we work alongside the family’s accountant on tax and benchmarking questions. We assist families across Australia and overseas, work with local lawyers in other countries, and advise in English, Mandarin and Cantonese so that parents, children and in-laws can all take part.
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Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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