Deductions
Private use
Private use is when something bought for a business is also used for personal purposes, which reduces both the income tax deduction and the GST credits you can claim.
Private use describes any use of a business asset, service or expense for personal or domestic reasons rather than for earning income. A ute used for weekend trips, a mobile phone used partly for family calls, or a laptop used for children's homework are common examples. The tax system generally allows deductions and GST credits only for the business or income-producing portion.
The basic approach is to work out the proportion of business use and the proportion of private use, then limit your claims to the business portion. For some items, such as a car, there are specific methods and record requirements. For others, such as a phone plan, you might use a representative period of itemised usage to set a percentage. The key is that the split must be reasonable and supported by records.
For GST, private use is dealt with through creditable purpose. If you are registered for GST and buy something partly for private use, you can only claim a credit for the extent to which you acquired it for your business. When you buy an item you estimate the business percentage, claim that share of the credit in the BAS, and keep a tax invoice if the price is above $82.50 GST inclusive. If your actual use later differs from your estimate, an adjustment may be needed.
Private use also arises with trading stock and money. If a sole trader takes goods from the shop for personal use, those goods are generally treated as if sold at market value for income tax, and a GST adjustment may be needed. Paying personal bills from a business account does not make them deductible, and should be recorded as drawings or a loan, depending on your structure.
Where a business is run through a company or trust, private use of business assets by owners or associates can create additional consequences, such as fringe benefits tax or deemed dividends, which are separate regimes with their own rules. These can be easy to overlook when family members use a business vehicle.
The most common mistake is claiming the whole cost of something because it was bought through the business, when part of it is clearly personal. Another is failing to keep a record that supports the percentage. This is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
A registered sole trader pays $1,100 including GST for a mobile phone plan for the year. Itemised usage shows 80% is for business and 20% is personal. The business portion is 80% x $1,100 = $880 inclusive of GST. The GST credit is $880 / 11 = $80, and the GST-exclusive deduction is $800. The remaining $220 is private and is neither deductible nor creditable.
Practical tips
- Keep a simple record supporting your business percentage, such as itemised phone usage or a diary of use.
- Do not pay personal expenses from the business account without recording them properly as drawings or loans.
- Remember that taking stock for your own use generally needs to be treated as a sale at market value.