Are you using Business Income for Personal Expenses?
Don’t get caught out! What the ATO needs you to know if you use business goods or business income for personal use.
It may seem natural to take or use stock or money from your own business here and there for personal use, but did you know the ATO has rules about declaring what you take, and it can have serious taxation implications both professionally and personally.
We’ve put together a rundown of the most important information you need to know here.
Using Business Income for Personal Expenses
The legal structure of your business determines how using business income for personal expenses is treated from a taxation perspective.
Sole Trader or Partnership
As a sole trader or partnership, revenue earned in the business is treated as personal income and is declared on your personal tax return. This means that money used from the business will be captured on your annual return and there is no further action required.
If you’re operating as a company and you use business income for personal expenses, it may be treated as a Division 7A loan and you’ll be required to validate the transaction with a complying loan agreement between yourself and the company.
Without a complying loan agreement, the money used may be treated as an unfranked dividend from the company and may also need to be declared in your personal income tax return.
This is a highly legislated type of payment arrangement and there are many implications for the company involved. It’s best to seek the advice of an accountant prior to making these transactions.
Division 7A Loan
ATO’s Division 7A legislation determines the meaning of loan as:
- An advance of money
- A provision of credit or any other form of financial accommodation
- A payment for a shareholder or associate, on their account, on their behalf, or at their request
- A transaction (whatever its terms or form that is the same as a loan of money
If these advances of money won’t be repaid within the same financial year, a complying loan agreement will need to set-up to record the transaction and set down the conditions for repayment.
Complying Loan Agreement
The ATO has specific criteria for a Division 7A loan agreement to be compliant.
Minimum interest rate – The interest rate of the loan must be equal to or greater than the ATO’s benchmark interest rate for each year.
Maximum term – A loan secured by a mortgage over real property can have a term of 25 years. For all other loans, the maximum term allowed is 7 years.
Written agreements – A loan made under a written agreement meeting the criteria above will not be treated as a dividend in the income year the loan is made. This agreement sets out the conditions for the loan and should be signed and dated by all parties.
So, unless monies received from a business over the course of a financial year are repaid or documented as a Division 7A loan with a complying loan agreement, they will be treated as dividends.
You can read more about income distribution from your business in our Drawings vs Wages article.
Using Business Stock For Private Use
If you use trading stock from your own business for personal use, you’ll need to include the value of the stock in your business assessable income. The stock is treated as if you sold it to a customer. The ATO outlines a number of ways to report these actions and also understands that in some businesses, it may be difficult to quantify the items taken.
As with all ATO directives, record keeping is important. You will need to record:
- The date
- The reason stock was taken
- A description of stock taken
- The cost or market value of the item
What Value Do I Report?
The ATO offers you two ways to report the value of business stock you use.
- Keep records of the actual value of items you take from your business for private use and report that amount; or
- Use the ATO’s list of estimates they provide annually for this purpose.
The ATO’s list focuses on business or industry types where it may be difficult to quantify items taken from an inventory perspective. (This may be due to being low value items, or items used in a transformation process such as baking). The business types include:
- Takeaway Food Shop
- Mixed Business
The ATO’s schedule can be used for these businesses, but if you’re in one of these industries and use more or less than the estimates, you can record and use exact values.
Cost or Market Value?
In most instances, stock used will need to be included into assessable business income at market value.
However, there is an exception to this ruling. If an item is taken for private use by a sole trader or all partners in a partnership, the item is then able to be reported at cost.
We know that ATO legislation can get confusing. Don’t get caught out! Speak to us for practical advice that is easy to understand.
IMPORTANT INFORMATION: This blog has been prepared by Modoras Accounting (QLD) Pty. Ltd. ABN 81 601 145 215. The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Accounting (QLD) Pty. Ltd. recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Accounting (QLD) Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Accounting (QLD) Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Accounting (QLD) Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication. Liability limited by a scheme approved under Professional Standards Legislation.