Accounting Treatment of Personal Expenses in a Privately Held Company (Australia)

When personal expenses are paid through a privately held company in Australia, the correct accounting treatment is essential. The way you classify these expenses affects GST, company tax, Division 7A rules, and franking credits.

This article outlines the three main approaches and explains their implications.

1. Treating as a Loan to the Shareholder/Director

• Accounting treatment: Record the personal expense as a loan receivable from the director/shareholder, not as a company expense.

• GST: Not claimable, since it is not a business-related expense.

• Tax impact: No effect on taxable profit. However, if the loan is not repaid, Division 7A of the ITAA 1936 may apply, potentially treating it as an unfranked dividend.

• Implications: Requires proper loan agreements and compliance if balances are not cleared before year-end.

✅ This is usually the cleanest option if the expense is clearly personal.

2. Recognising as a Non-Deductible Expense

• Accounting treatment: Record the amount as an expense in the profit & loss but adjust at tax time as non-deductible.

• GST: Not claimable.

• Tax impact: Creates a mismatch between accounting profit and taxable profit. This can result in excess franking credits that may not be fully usable.

⚠️ This approach is sometimes used for simplicity but can distort reporting.

3. Recognising as a Fringe Benefit

• Accounting treatment: Record the personal expense as a company expense and claim GST where applicable.

• FBT: Subject to Fringe Benefits Tax (FBT) at 47%. Requires lodging an FBT return and proper record-keeping.

• Tax impact: The expense is deductible, but the company bears the cost of FBT.

👉 This is usually only suitable where the company intentionally provides personal benefits (e.g., cars, entertainment).

✅ Recommended Approach

For incidental personal expenses, the most appropriate method is to treat them as a loan to the shareholder/director (Option 1). This avoids GST and non-deductible issues while remaining compliant with Division 7A requirements.

If the company deliberately provides benefits, then FBT treatment (Option 3) is required.

Option 2 (non-deductible expense) is possible but often creates reporting mismatches.

Conclusion

Each option has different compliance and tax consequences:

• Loan → Clean and compliant, but must manage Division 7A.

• Non-deductible expense → Simple but may cause distortions.

• Fringe benefit → Deductible, but FBT cost and admin burden.

💡 Always consult a qualified tax advisor before finalising your company’s policy.