Using business money and the tax consequences

Are you using money or assets from your business for private purposes? If so, it’s important to understand the potential tax consequences and how to properly account for these transactions. Failing to report or incorrectly handling such transactions can lead to complications with the tax authorities, such as penalties or additional tax liabilities.

Business owners often use company resources for personal reasons, whether intentionally or inadvertently. This could range from using a company car for personal errands to withdrawing funds for non-business purposes. While this might seem harmless, improper documentation and reporting can trigger red flags in audits or tax filings.

Types of Business Money or Assets Used for Private Purposes

Business resources that might be used for private purposes include:

• Salary and Wages: If you take a salary from the business, ensure it’s properly recorded as part of your income and taxed accordingly. Failing to report personal withdrawals as income can result in underpayment of taxes.

• Director Fees: If you’re receiving fees as a director, these need to be included in your personal income tax return, just like salary or wages.

• Fringe Benefits: This can include non-cash perks like using a company car for personal travel, or enjoying other business-provided amenities. These are subject to Fringe Benefits Tax (FBT) in many jurisdictions.

• Dividends: If your company is profitable and you take dividends as a shareholder, these distributions of profits must be reported in your personal tax return. The tax treatment of dividends depends on your country’s regulations, such as whether they are fully franked or unfranked in Australia.

• Trust Distributions: If your business operates under a trust structure, distributions to beneficiaries (including yourself) are taxed in the hands of the beneficiary. Failing to report this income correctly could lead to penalties.

• Loans from the Business: If you borrow money from your company or trust, ensure it’s structured as a formal loan with appropriate interest and repayment terms. Otherwise, the loan might be treated as unreported income, leading to tax consequences.

• Ad Hoc Drawings: Business owners often take funds from the business in an ad hoc manner. While this can be convenient, these drawings must be treated either as salary, dividends, or loan repayments, and properly accounted for to avoid tax issues.

• Allowances and Reimbursements: If the business reimburses you for expenses or provides you with allowances, ensure these are correctly categorized. For example, reimbursements for legitimate business expenses might not be taxable, but allowances might be.

How to Avoid Tax Pitfalls: 2 Essential Steps

1. Accurately Report the Transactions
   Every time you use business money or assets for private purposes, you need to record this transaction in the relevant tax return—be it for your company, trust, or individual return. Failing to do so could result in tax discrepancies, audits, or fines. It’s critical to understand the tax implications for each type of withdrawal or benefit.

2. Keep Detailed and Accurate Records
   The importance of accurate record-keeping can’t be overstated. Each transaction involving business money or assets for private use should be carefully documented. This includes having written agreements for loans, maintaining logs of personal use of company vehicles, and keeping receipts for expense reimbursements.

Regularly review and cross-check your records with your original documentation, such as receipts, invoices, and bank statements. Doing this will allow you to spot any discrepancies early and ensure that you’re on top of your business’s cash flow.

Common Scenarios and How to Handle Them

Here are some examples of how business resources may be used for private purposes and how to handle them:

• Using the Company Car for Personal Use
  If you use a company car for personal reasons, you must calculate the proportion of business vs. private use and report the private portion as a fringe benefit. The business will be liable for Fringe Benefits Tax (FBT) on this personal use, which can vary based on how frequently the vehicle is used for non-business purposes.

• Withdrawing Funds for Personal Use
  A withdrawal from your company’s account for personal use can be treated as a loan, salary, or dividend. It’s important to categorize it correctly and record it in your financial statements and tax returns to avoid any tax discrepancies.

• Personal Use of Business Assets
  If you’re using business assets, like equipment, for personal projects or home use, you’ll need to report the fair market value of the usage and account for any applicable taxes.

Importance of Regularly Updating Your Knowledge

Tax laws and regulations regarding business finances are complex and subject to change. Staying up to date with current tax policies is essential for avoiding unnecessary penalties. For business owners, completing the Australian Tax Office’s (ATO) self-paced course on using business money and assets is a great way to learn how to manage your finances properly. This course provides practical insights into recording and reporting your transactions.

You can also complete the ATO self-paced course on using your business money and assets