Can I Use Company Money for My Personal Spending?

In Short

• Using company money or assets for personal expenses can breach directors’ duties and trigger penalties, funds and assets belong to the company, not to individuals.

• Personal use of company funds may be treated as a loan or unfranked dividend under tax law (often under Division 7A), triggering tax and reporting obligations for both the company and the individual.

• To minimise risk, businesses need clear expense policies, proper documentation, and must ensure any private benefits are correctly declared or formalised.

Tips for Businesses
Create and enforce a written policy that prohibits personal spending from company accounts. Require receipts or formal loan agreements for any personal use of company funds. Review all transactions before the financial year-end to check for undisclosed personal benefits.

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Table of Contents

• The General Rule: Keep Business and Personal Separate
• What if I Use Company Money for My Personal Spending?
• Declaring a Dividend
• Are There Other Options?
• Directors’ Duties
• Key Takeaways
• Frequently Asked Questions

As a company director, it’s crucial to understand the legal and ethical implications of using company funds for personal expenses. While it might seem convenient to tap into business resources for personal expenses, doing so can lead to significant legal, financial, and tax consequences. This article explores the risks and considerations of using company funds for personal spending.

The General Rule: Keep Business and Personal Separate

The overarching principle is that business funds and assets should be used solely for business purposes. The ATO is clear that businesses that use their funds or assets for private use may face tax consequences.

What if I Use Company Money for My Personal Spending?

In Australia, using company money for personal expenses can trigger Division 7A of the Income Tax Assessment Act 1936. Under Division 7A, transactions can be treated as deemed dividends. This leads to significant tax consequences to the person benefiting from the personal spending, who is generally the shareholder or ‘associates’ of the shareholder.

Unlike properly declared dividends, deemed dividends under Division 7A do not come with franking credits, potentially increasing tax liability, as you will not benefit from the tax offset. 

What is a Deemed Dividend?

Deemed dividends are payments or benefits provided by a company that are treated as dividends for tax purposes. Deemed dividends are generally taxable for the recipient at their marginal tax rate, though they may or may not be frankable depending on the circumstances.

What Does “Frankable” Mean?

Frankable refers to a dividend’s ability to carry ‘franking credits’. Franking credits represent the tax a company has already paid on its profits before distributing dividends. When a dividend is frankable, it means the company can attach these franking credits to the dividend payment. This system, known as dividend imputation, aims to prevent double taxation of company profits. If you are a shareholder and receive a frankable dividend, you can use the attached franking credits to offset your personal income tax liability. 

Declaring a Dividend

Declaring a dividend is a formal way to distribute a company’s profits to shareholders. The company’s board of directors (or, if you are a sole director) must approve and declare the dividend.

It’s important to note that dividends can be paid only from profits, and the company must have sufficient profits and a favourable net asset position to do so. You will need to declare the dividend as income on your personal income tax return. 

Are There Other Options?

Division 7A Compliant Loan Agreement

When you need funds for personal use, borrowing from your company can be a more appropriate and legally compliant option than simply using company money for personal expenses. However, it’s crucial to understand the rules and implications of such borrowings to avoid triggering Division 7A implications as mentioned above.

For more information on Division 7A complaint loans, please refer to our article on Division 7A loans.

Directors’ Duties

As a director, you have several duties you must abide by. This means that if you use company money for a purpose that is not in the best interest of the company, you may be breaching your director’s duties. 

Additionally, you may face substantial penalties, be held personally liable for company losses, or be required to pay compensation. In cases of serious misconduct, you could face criminal charges resulting in fines or imprisonment. 

Directors' Duties Complete Guide

If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.

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Key Takeaways

Using company money for personal expenses risks severe legal and tax consequences. It can trigger Division 7A, resulting in deemed dividends and increased tax liability. Alternatives like compliant loans or properly declared dividends require careful structuring.

Directors who misuse company funds may breach the following:

• fiduciary duties;
• risking disqualification;
• penalties;
• personal liability; and
• criminal charges. 

To protect yourself, you should maintain strict separation between personal and business finances, act in the company’s best interests, and seek professional advice before using company funds for personal purposes.

If you have any other questions regarding expenses and their tax implications, our experienced taxation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions