Small businesses and privately owned and wealthy groups sometimes purchase assets such as boats, horses or racing cars. If these assets are used to earn business income, you can generally claim deductions for them. If you use the assets for a mix of business and private use, you must only claim the portion related to your business.
We have found that when the assets are used partly for the business and partly for private purposes some businesses make common mistakes when accounting for that use. It's important to make sure all your assets are accounted for correctly, including where they are used for private purposes.
Avoid mistakes
To get your tax right for the use of your assets:
- only claim deductions against your business income for expenses associated with the business use of your assets. You need to work out the portion spent on private use and exclude this from your calculation
- make sure you meet your tax obligations, including private company benefits and fringe benefits tax (FBT), which may apply when you provide benefits to your employees, shareholders or associates
- review your treatment of these assets each year, as your circumstances may change. If you have started using an asset for private purposes, you need to start apportioning your expenses accordingly
- keep proper records for your business that can explain all transactions, including payments to and receipts from employees, shareholders and associates
- let your tax professional know how you're using your assets so they can correctly apportion the relevant income and deductions.
If you're unsure about accounting for your assets, speak with your tax professional or engage with us for advice.
Common mistakes
Some of the common mistakes we have identified include:
- Claiming deductions for private assets
- Incorrectly apportioning deductions
- Giving rise to a deemed dividend
- Creating an FBT liability
Claiming deductions for private assets
You can't claim a deduction against your business income for expenses associated with an asset that has been used entirely for private purposes.
Example 1: Claiming deductions
A tavern operator purchased a boat for two million dollars and claimed it was purchased by the company with the intention of offering boat charters to patrons of the tavern.
The business claimed large deductions for expenses associated with chartering and maintaining the boat, however they also reported minimal income.
This attracted our attention and when a review was conducted we discovered that the:
- tavern was sold soon after the boat was purchased
- boat was never insured to legally operate as a commercial vessel and didn’t meet specifications required to gain the appropriate insurance cover
- boat was used as a home office for the director and for other private purposes.
We determined the boat was not used in the business, but rather for the private use of the director. The deductions were disallowed and the client was required to pay the tax shortfall, with interest and penalties.
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Incorrectly apportioning deductions
If your expenses are for both business and private use, you can only claim a deduction for the business-related portion. You need to work out the percentage that relates to your business use.
Example 2: Apportioning deductions
A director claimed an aircraft was purchased by their business for the purpose of expanding into regional areas of the state and to provide chartered flights to the public.
Over several financial years, the company’s accountant claimed ongoing large deductions for expenses associated with the cost of hiring out the plane. However, there was minimal or no income generated by business activities linked to the aircraft.
The tax outcomes related to this asset attracted our attention and we conducted a review. The review found that the:
- relationship couldn’t be established between use of the aircraft and expansion of the business
- company stopped offering chartered flights soon after the aircraft was purchased as it didn’t meet legal requirements to operate commercially
- aircraft was predominately unavailable for hire to the public
- majority of flight hours were undertaken by the director and were of a private nature.
We determined the overall use of the aircraft was a private pursuit, with limited periods of business use through chartered flights. The company’s tax returns were amended to reduce the amount of deductions claimed, by apportioning and removing the private component of the expenses. The company was required to pay the tax shortfall and interest as well as penalties.
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Giving rise to a deemed dividend
A deemed dividend may arise when you purchase an asset through your company and it's used for private purposes by a shareholder or their associate.
Both the company and recipient of the dividend must record these on their tax returns.
Example 3: Private company benefits – Division 7A deemed dividend
A director who operated a consulting business claimed they personally competed in a racing network. The company purchased vehicles and claimed over a million dollars in deductions for racing activities over several financial years. They stated the vehicles and activities were used for advertising and to further their business income.
This behaviour attracted our attention and we conducted a review of the business. The review found:
- there were some vehicle and racing expenses associated with running the business; however, the scale of these expenses was disproportionate in comparison to business income
- the company’s business plan, client base and use of the vehicles were not sufficient to justify that the racing costs were an expense incurred to build a client base
- the vehicles were owned by the company but stored and used privately by the director
We determined the company was claiming deductions for a private pursuit and not for the purpose of furthering the consulting business.
As a result, the deductions claimed for racing expenses were disallowed and the company had to pay the tax shortfall, as well as interest and penalties.
The private use of the racing vehicles was treated as a deemed dividend on the basis that the company had provided assets for the personal benefit of the director who was a shareholder. The director was required to include the deemed dividend in their assessable income. Their personal tax returns were amended and they had to pay the tax shortfall, interest and penalties.
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Creating an FBT liability
An FBT liability may arise when a business purchases an asset that is used by an employee or associate of an employee for personal purposes.
Both the business and the employee must report these correctly.
Example 4: FBT liability
A property company claimed deductions for a boat on the basis that it was used for marketing the company. Large deductions were claimed relating to running the boat. This attracted our attention and we conducted a review.
We discovered the boat was used by the director and other employees for private trips, and to host parties for people who had paid to attend the company's property seminars.
When looking at the overall business activities, we determined the director had purchased the boat primarily for their own private use. As a result, we disallowed the deductions and the private use of the boat was a fringe benefit for the employees of the company. The company had to lodge an FBT return and pay the resulting FBT liability, as well as the income tax shortfall, interest and penalties.
End of exampleIf you made a mistake
Before you lodge your tax return make sure you have correctly apportioned expenditure for your assets and considered the application of private company benefits and FBT provisions.
If you realise you've made a mistake, you will need to amend or lodge an income tax or fringe benefits tax return to correct your tax position.
You can contact us or speak with your tax professional to correct these mistakes.
See also:
- What attracts our attention
- Income tax return
- Correcting a mistake
- Privately owned and wealthy groups