Separating business and personal expenses

That’s why moments of overlap can seem harmless. Maybe you use the business card to cover a personal bill, thinking you’ll sort it out later, or you take the company vehicle for a weekend getaway.

But the tax office sees your business quite differently: as its own legal entity, with its own rules and responsibilities. And crossing the line, even unintentionally, can lead to complications that are better avoided.

Imagine someone who runs a thriving small business. They’re the sole director in the company that owns the business. After years of hard work, the business owner books a long overdue personal holiday and charges it to the business credit card. They plan to reimburse the company but with tight deadlines and tax time approaching, the repayment slips their mind.

When the business owner lodges the company’s tax return, that innocent transaction hasn’t been dealt with properly. According to Division 7A of the tax law, the payment could be treated as personal income and taxed at the business owner’s individual marginal rate. It’s known as an unfranked dividend.ⁱ

Division 7A exists to ensure that shareholders (and their associates, like family members or business partners) don’t use company funds in ways that sidestep formal dividend payments. If money is withdrawn or business assets are used privately without the correct documentation - such as loan agreements or reimbursement records - the ATO may step in and reclassify those transactions as income. The result? Unexpected tax bills and a lot of stress.ⁱⁱ

What counts as private use?

It’s not just about major purchases. Even small , recurring habits can raise red flags. For example:

• Paying for groceries or rent from your business bank account
• Using company tools, vehicles or property for personal reasons
• Lending money to a relative from the company’s reserves
• Failing to create a loan agreement when borrowing from your business

If the money isn't repaid or formalised before lodgement day, these amounts may be treated as Division 7A dividends, even if the spending was accidental.

Borrowing money without a complying loan agreement, or simply taking the money and failing to declare it, can also lead to major tax headaches.

Fringe benefits and private use of assets

Let’s say you occasionally drive the company car to drop the kids at sport or to pop down to the local hardware store on weekends. It seems harmless but unless it’s documented correctly, it could attract Fringe Benefits Tax (FBT).ⁱⁱⁱ

Businesses must:

• declare private usage in their annual FBT return
• keep records of reimbursements and expenses
• ensure that any benefits are correctly valued and disclosed

FBT might feel like one more thing to worry about, but it can also work in your favour. Businesses may claim GST credits and tax deductions related to fringe benefits, provided everything is above board.

Practical tips to stay on track

If you do use business money or assets for personal purposes, recordkeeping becomes your best ally. Here’s what that might look like:

• Create clear loan agreements between the right entities
• Avoid journal entries that falsely suggest repayments
• Don’t borrow company funds to repay previous Division 7A loans
• Ensure loan repayments meet the benchmark interest rate set by the ATO
• Declare all interest earned by the company as part of its assessable income
• Include relevant transactions in the tax returns of both the company and the person receiving any benefit.

Resources to help

While the rules are firm, the ATO does offer resources to make them more manageable. The ATO has a number of webinars explaining common issues surrounding the Division 7A rules, plus a Division 7A repayment calculator and decision tool.

Small business owners can also take a short online education courseoutlining the rules for using business money and assets.

If you’re unsure whether a past transaction needs correcting, or you want to make sure your systems are set up properly for the future, we’re here to help. An early conversation now could prevent a last-minute panic when tax time rolls around.

i Managing Division 7A risks, and corrective action | Australian Taxation Office

ii Tax treatment of Division 7A dividends | Australian Taxation Office

iii Fringe benefits tax (FBT) | Australian Taxation Office