Are You Blurring the Lines Between Business and Personal Expenses? The ATO is Watching.

Running a small business is like having another child – it demands a lot of your time and attention. Sometimes, the lines between your personal life and your business can get blurry. But when it comes to company finances, the Australian Taxation Office (ATO) expects clear distinctions.

Why the ATO is Cracking Down on Personal Use of Company Funds

The ATO is launching an educational campaign to remind business owners about the tax implications of using company resources for personal gain. This is because Division 7A of the tax law exists to prevent shareholders from accessing company profits or assets without paying their fair share of tax.

What is Division 7A and How Can it Affect You?

Imagine this: you take out a “loan” from your business account to cover a personal expense. Under Division 7A, this could be seen as a deemed unfranked dividend, meaning you’d be taxed on that amount at your marginal tax rate (which can be much higher than the company tax rate).

  • Incorrect accounting for the use of company assets by shareholders and their associates. Often, the amounts are not recognised;
  • Loans made without complying loan agreements;
  • Reborrowing from the private company to make repayments on Division 7A loans;
  • The wrong interest rate applied to Division 7A loans (there is a set rate that must be used).

Ouch! How to Avoid Division 7A Headaches?

Here are some simple steps to keep the ATO happy and your finances organized:

  • Keep it Separate: Don’t use your company account like a personal piggy bank. Open a dedicated business bank account for all business transactions.
  • Be a Record Keeper: Every company expense, from office supplies to travel, needs a proper record. This includes any transactions with yourself or associates.
  • Loan Like a Pro: If you must borrow from your company, treat it like a real loan. Have a written agreement with a set interest rate (as determined by the ATO) and a clear repayment plan.
  • Act Fast: If you’ve already dipped into company funds for personal use, there might still be time to fix it. Speak to your accountant about repayments or setting up a complying loan agreement before the company tax return deadline.

By following these tips, you can ensure your business finances are in order and avoid any unwanted attention from the ATO. Remember, Business Edge Advisors are here to help you navigate the complexities of tax law. Feel free to contact us for a consultation!