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Using your business money and assets for private purposes

You may need to report money and assets taken from your company or trust as income in your tax return.

Last updated 16 July 2024

For a summary of this content in poster format, see Using business money and assets (PDF, 274KB)This link will download a file.

Who needs to know?

This information will help you understand how money taken out of your business, or using business assets for private purposes, must be recorded and reported for tax purposes.

It applies if you are an individual who:

  • is a director, shareholder or employee of a company that operates a small business (your business)
  • is a trustee, beneficiary or employee of a trust that operates a small business (your business)
  • is a director of a corporate trustee for a trust that operates a small business (your business)
  • is or has been an associate of a shareholder (individual or entity) of a private company. An associate can include a relative, partner, spouse, or another entity controlled by a shareholder.

How do you use money or assets from a company or trust

The most common ways you may take or use money or assets from a company or trust are as:

There are reporting and record-keeping requirements for each of these types of transactions.

How to record and report the use of your business money or assets

You must maintain appropriate records that explain transactions where you have:

  • taken money or assets from your business
  • used the business's assets for private purposes.

The ATO view on minimum record-keeping standards is provided in Taxation Ruling TR 96/7.

There may also be reporting requirements for these transactions.

In this section

Salary, wages or directors’ fees

You can be an employee, director and shareholder of the company that operates your business. You can also be an employee and a beneficiary of the trust that operates your business.

You must include any salary, wages or directors' fees you receive from your business as assessable income in your individual tax return.

The company or trust that operates your business can generally claim a deduction for any salaries, wages or directors' fees paid if it complies with the pay as you go (PAYG) withholding and reporting obligations for each payment.

Your business must:

Example 1: taking money as salary or wages

Daphne is the sole director of a private company that sells speciality gift hampers to customers. She and her partner Jo are equal shareholders in the company. Before this income year, Daphne ran the business as a sole trader.

As a sole trader, Daphne paid $1,500 a month out of her business account and into her personal account for personal expenses. Regardless of the amounts that were transferred to her personal account, all the income Daphne earned as a sole trader is included as business income in the business and professional items schedule on her individual tax return.

Daphne decided to change business structures and set up a private company to run her business. Daphne is an employee, shareholder and director of the private company.

Daphne's tax agent explains to her that there are different tax consequences now that the business is run through a company, which is a separate legal entity.

As an employee of the company, Daphne is paid $1,500 a month as a salary. Daphne now reports the $1,500 a month she receives from her employment as salary in her individual tax return.

The tax agent helps Daphne set up PAYG withholding and STP reporting, as well as meet her company's superannuation guarantee obligations.

The company lodges a separate annual tax return. It reports the business income and claims a deduction for the salary paid to Daphne in the company tax return.

End of example

Fringe benefits and allowances

Fringe benefits tax (FBT) applies when an employer provides certain benefits to its employees, directors, and their associates. This could be a payment or reimbursement of private expenses or being allowed to use the business assets for private purposes, such as the business's car.

Your business:

  • may be entitled to claim a deduction for the cost of providing fringe benefits
  • must lodge an FBT return and pay any FBT that applies to the fringe benefits provided to the employees or their associates
  • must keep all records relating to the fringe benefits it provides, including how the taxable value of benefits was calculated.

There are various exemptions from FBT that may apply, for example, the small business car parking exemption.

There are also rules that address when FBT and Division 7A could both apply to a payment, loan or debt forgiven.

An FBT liability for your business may be reduced if you (as an employee) make a contribution towards the cost of the fringe benefit.

You don’t need to report the value of fringe benefits that you (or your associate) receive in your tax return, unless they are included as reportable fringe benefits on your payment summary or income statement.

Example 2: FBT on the provision of private company assets to employees who are shareholders

Sameera is the sole director and shareholder of a small tourism company that runs tours and owns 3 coastal holiday houses.

Sameera is also one of 3 employees of the private company.

Each employee of the company is given the opportunity to stay in one of the holiday houses for up to 4 weeks each year during the off-peak season.

This year, Sameera and her family take up this offer and stay at their favourite holiday house for 2 weeks of their own holidays at no cost.

This is an employee’s private use of one the company’s business assets. The company is providing Sameera, in her capacity as an employee, with a fringe benefit.

The company reports the fringe benefit in its FBT return and pays FBT on the benefit.

End of example

Distribution of income and profits

In this section

Dividends

If your business is run through a company, the company can distribute its profits to its shareholders, which can include you.

This distribution of profits is known as a dividend.

If the company has franking credits, it may be allowed to frank the dividend by allocating a franking credit to the distribution. A franking credit represents income tax paid by the company on its profit and can be used by the shareholder to offset their income tax liability.

A company must issue a distribution statement at the end of each income year to each shareholder who receives a dividend. It must show the amount of the franking credit on the dividends paid and the extent to which they were franked. The company may also need to lodge a franking account tax return in certain circumstances.

Any dividends that you receive and franking credits on them must be reported in your tax return as assessable income.

The company cannot claim a deduction for dividends paid as these are not a business expense, but rather a distribution of company profit.

Trust distributions

If your business is operated through a trust, depending on the terms of the trust deed, the beneficiaries of the trust may be presently entitled to a share of the trust income for the financial year

By the end of an income year, the trustee should advise and document in the trustee resolution:

  • details of the beneficiaries
  • their share of the net income of the trust.

If the trustee resolution is not made according to the terms of the trust deed, it may be ineffective and, instead, other beneficiaries (called default beneficiaries) or the trustee may be assessed on the relevant share of the trust's net (taxable) income. Where a trustee is assessed, it may be at the highest marginal tax rate.

Details of the trust distribution should be included in the statement of distribution which is part of the trust return lodged for each income year.

The trust cannot claim a deduction for distributions paid as it is not a business expense, but rather a distribution of trust income.

If the beneficiary of a trust is a company, and the trust does not pay the amount the company is presently entitled to, Division 7A of the Income Tax Assessment Act 1936 may apply.

Closely held trusts

If you have a trust within your family group, in some circumstances you may need to include a trustee beneficiary statement as part of the trust return lodged.

For further guidance, see closely held trusts.

Lending money or assets

In this section

Companies lend money or assets to shareholders and their associates

When a private company lends money or assets to its shareholders or their associates, the shareholder or associate may be taken to have received a Division 7A deemed dividend if certain conditions are not met.

If this happens, the shareholder or associate will need to report an unfranked dividend in their individual tax return. The company will also have to report the unfranked dividend paid in its company tax return and adjust its balance sheet to reduce its retained profits.

To avoid a Division 7A deemed dividend, before the company tax return is due or lodged (whichever comes first), loans must either:

  • be repaid in full, or
  • put on complying terms.

To put a loan on complying terms, the loan must be made subject to a written agreement that:

  • states the names of the parties to the agreement, being the private company and the shareholder or shareholder's associate (the loan recipient)
  • is signed and dated by the private company and loan recipient
  • has an interest rate for each year of the loan that at least equals the benchmark interest rate
  • does not exceed the maximum term of 7 years, or 25 years in certain circumstances when the loan is secured by a registered mortgage over real property.

The company must include any interest earned from the loan in its company tax return and complete the Division 7A company tax return labels.

You (the shareholder or shareholder's associate):

  • must make the minimum yearly repayment for the loan each income year (use the Division 7A calculator to work this out)
  • cannot borrow money from the company to make the minimum yearly repayment
  • can make repayments on the loan by offsetting against your entitlement to a dividend declared by the company. This dividend must still be reported in your individual tax return as assessable income.

Example 3: loan received from the company and put on complying terms

Amir is the sole director of a private company that provides administration services to other businesses. He and his partner Aiesha are equal shareholders in the company.

Amir's and Aiesha's daughter is about to start high school and they have to pay $2,000 in school fees. Amir decides they should use money from the company to pay for the fees.

Amir knows that he cannot pay for a private expense using the company’s money without properly accounting for it. As the director, he decides that the company will lend him and Aiesha the $2,000.

He draws up a written loan agreement for the loan to be repaid over 2 years, with an interest rate equal to the benchmark interest rate. The loan agreement identifies the company, Amir and Aiesha as the parties, and the repayment terms. It is signed by all parties. The loan agreement is made on complying terms under Division 7A.

The company lends Amir and Aiesha the money, which they pay back to the company with interest each year according to the agreement over the next 2 years. When Amir prepares the company tax return, he declares the interest as income for the company.

End of example

Trustees lend money or assets to beneficiaries and their associates

If you borrow money from the trust, you will need to keep a record of it. If the loan is on commercial terms, you will need to repay the principal and interest as per the loan agreement. The trust will need to report the interest as assessable income in its tax return.

There may be a situation where someone receives an amount of trust income instead of the beneficiary who is presently entitled to that amount in an arrangement to reduce tax. This can happen where the trustee, instead of paying the trust income to the presently entitled beneficiary, lends that money on interest-free terms to another person.

This is called a reimbursement agreement and the anti-avoidance rule in section 100A of the Income Tax Assessment Act 1936 may apply.

Repayments of loans made to companies and trusts

If you have lent money to your business, your business cannot claim a deduction for any repayments of principal it makes to you. However, it may be able to claim a deduction for interest it pays to you on the loan. The company or trust should keep records of any loan agreements and documents explaining these payments being made to you.

You do not have to declare the principal repayments, but any interest you receive from your business is assessable income to you and must be included in your individual tax return.

When you take your business's money or assets in another way

If you take money out of your business or use its assets for private purposes in a way not described above, you or your business may have unintended tax consequences.

To ensure your business transactions are transparent:

  • You should consider setting up a separate bank account for your business to pay business expenses from, and avoid using it to pay for your private expenses.
  • If you take money out of the business or use its assets, make sure you keep proper records that explain all relevant transactions, including all income, payments and loans to you and your associates from the business.
  • If your private company lends money to you or your associates, make sure the loan complies with Division 7A.
  • Ensure the transactions are correctly reported for tax purposes.

If you make an honest mistake when trying to comply with these obligations, you should tell us or your registered tax agent as soon as possible.

Example 4: repaying a loan before the company's lodgment day

Jian is the sole director and shareholder of a private company, that he uses to run his plumbing business. Jian decides to have his home repainted, which he pays for using his company’s bank account.

Jian meets regularly with his bookkeeper, who notices the unusual transaction.

The bookkeeper advises Jian that the transaction will be treated as a Division 7A deemed dividend if he doesn’t pay the money back or make it a complying loan before the earlier of when the company tax return is due or lodged for the income year (the company lodgment day). Jian has enough money in his personal bank account, so he decides to repay the company the full amount.

As he repays the full amount before the company’s lodgment day, there are no Division 7A consequences for Jian.

He also takes his bookkeeper’s advice and makes sure he stops paying his private expenses from the company bank account.

End of example

 

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