Personal Use of Business Assets is Okay – But Keep Your Records!
Has your business got vehicles, property or equipment you or your staff use for personal purposes?
There’s no problem with doing this, so long as business assets are accounted for correctly!
At Xero Certified Advisors On The Money Melbourne Bookkeeping Services, we often see business owners neglecting this area of accounting. Still, it’s not hard once you have some systems in place to track personal and business use percentages.
If you privately use a car or equipment such as computers or tools that are owned by your business, you need to deduct the percentage of personal use from your accounts, as you can only claim the portion related to your business as a business deduction. And this also applies to GST – you can only claim the amount of GST pertaining to business usage.
Better to get it right before each financial year end and tax return rather than go through an ATO review that highlights record-keeping errors! Some businesses own a lot of assets that could be used personally by shareholders or staff, and you want to ensure the records are correct to avoid fringe benefits tax or penalties for incorrect records.
Whether your private use of assets amounts to 5% or 50% or more, you must keep records to substantiate your claims for business expenses.
How to Account for the Personal Use of Business Assets in Your Accounts
There are several ways of accounting for personal and business use percentages.
If you know your private use percentage, you can adjust each transaction relating to the asset in question. For example, if your tax agent has advised you that 20% of your vehicle costs should be allocated to personal use, this would mean that for each transaction relating to the vehicle (such as fuel purchases, repairs or insurance), you would have two line items included in the total. One line equals 80% of the cost, allocated to the relevant expense account with GST where applicable. The other line equals 20% and is assigned to the owner drawings or loan account as BAS excluded.
Another way of entering the personal use amount into your accounts is to do a monthly or quarterly adjusting journal. This way, you allocate all the vehicle expenses to the business expense account during the reporting period. You would then total the expenses related to the business asset for the month or quarter and deduct the private use percentage from the total, allocating it instead to drawings or a loan account. This way, the GST claims on each BAS are correct because you have reversed the percentage used personally during that period.
The ATO also allows an annual apportionment as an alternative method of accounting for personal use. This would be captured at the end of the financial year. You may have paid for all expenses throughout the year from the business account and claimed all the GST. You can then include an adjustment in the final BAS for the year, capturing the personal percentage deduction. This will reduce the GST claim and allowable business tax deductions.
If there is significant personal usage of some assets regularly, consider apportioning all transactions according to the relevant percentages or at least doing a monthly journal entry so that the financial reports for each month are correct.
Patterns of Usage
Sometimes the pattern of usage changes over time. If you capture the personal use percentage monthly, quarterly or annually, you can adjust the percentages when relevant to each reporting period. If you have accurate records of the private use amount, this is easy to calculate and enter into your accounts.
If usage patterns don’t vary, you can stick with that percentage, whether adjusting each transaction or doing monthly, quarterly or annual adjustments.
When selling a business asset, the same percentages apply as you have used for claiming expenses or personal usage.
You can also average the percentages when an asset is sold if the patterns of usage vary. For example, the business may purchase a vehicle and use it only for business purposes for two years. In the third year, it might have been used personally 30% of the time; in the fourth year, say 20% and in the fifth year, 25%. You average this percentage out over the lifetime of the asset, so in this example, the personal use averages out to be 15% over the asset’s five-year life. This averaged pattern of usage is then captured in the accounting when the asset is sold.
Fringe Benefits Tax Could Apply!
If you provide vehicles or other assets to staff that they use outside of work, this could be considered a fringe benefit. Providing employee benefits in addition to salary or wages could attract fringe benefits tax (FBT). Fringe benefits tax is a complex area of accounting, and you would need to get specific advice from a tax agent about your situation if you think this might apply. Part of the reason for accounting for the personal use of assets is to avoid getting an unexpected FBT bill down the track!
Business Keeping for Financial Integrity
Your Xero Certified Advisor On The Money Melbourne Bookkeeping Services can, of course, take care of all these details for you! Making sure your Xero file has accurate transaction records, detailed general ledger accounts and verified financial reports is what we do best.
Check the ATO link for further details about using business assets for your private use.
Although the principles of accounting for the personal use of business assets are relatively straightforward, there are many elements to take care of. For example, asset records affect depreciation, asset pools, asset disposals and, ultimately, the entity’s financial reports. And there could be an FBT bill and penalties if it’s not done correctly. Talk to us if you’d like an appraisal of your Xero file or if you’d like to hand over the management of your bookkeeping to On The Money Xero Certified Advisors, and you’ll soon elevate your business success by having your accounts managed by a team of experts!