Business vs Personal Expenses: AU Tax Law 2025

Business vs personal expenses is governed in Australia by a strict “nexus” test: an expense is only deductible to the extent it is incurred in gaining or producing assessable income (or necessarily incurred in carrying on a business for that purpose), and it is not private or domestic in nature. From an Australian accounting practice perspective, staying on the right side of tax law in 2025 is primarily about (1) correctly characterising the purpose of each outgoing, (2) apportioning mixed-purpose costs on a reasonable basis, and (3) maintaining contemporaneous evidence that satisfies ATO substantiation requirements—because misclassification is a common trigger for ATO adjustment, penalties and interest.

What is the legal difference between a business expense and a personal expense?

A business expense is an outgoing incurred in the course of earning assessable income (or necessarily incurred in carrying on a business to earn assessable income), whereas a personal expense is private or domestic and is not deductible.

Key legal touchpoints Australian accountants rely on include:

• General deduction rule: Income Tax Assessment Act 1997 (ITAA 1997) section 8-1
• ATO guidance: The ATO’s published guidance on deductions and substantiation (including occupation and industry guides, and guidance on “work-related expenses”) consistently applies the same principles: purpose, nexus, and evidence.

Practical accounting translation: if you cannot clearly explain “how this cost helps generate taxable business income” and demonstrate it with records, it is likely to be denied or partially denied.

Why does the ATO care so much about business vs personal expenses?

The ATO focuses on this area because mischaracterisation is common, highly scalable (across many taxpayers), and often material—especially where owners use business funds for private consumption.

From a compliance risk standpoint, the ATO frequently scrutinises:

• Private portions of motor vehicle, home, travel, meals/entertainment, and mobile/internet costs
• Over-claiming of “work-related” style deductions by small business operators and individuals
• Owner drawings incorrectly coded as business expenses
• “Lifestyle” spending run through the business (e.g., holidays, clothing, groceries) described with vague labels

Consideration must also be given to integrity measures (including penalties for lack of reasonable care or recklessness) where claims are unsupported.

How do you apply the “nexus” test in practice (ITAA 1997 s 8-1)?

You apply the nexus test by asking: “Is this outgoing incurred in the course of producing assessable income, and is it not private/domestic?”

A disciplined approach used in Australian practices is:

1. Identify the true purpose of the expense at the time it is incurred (business, private, or mixed).
2. Link the expense to income generation (e.g., sales activity, client delivery, compliance requirement, business operations).
3. Check for exclusion rules:
4. Apportion mixed-use costs on a reasonable, evidence-based method.
5. Substantiate with records that show supplier, date, amount, and business purpose.

• A director uses the company card for a family weekend away and codes it to “travel”. Even if the business discussed work over dinner, the dominant purpose remains private; absent a genuine business trip purpose with an itinerary and business activities, the ATO position is commonly adverse.

What are the highest-risk expense categories for mixing business and private?

The highest-risk categories are those where private benefit is common and apportionment is required.

Is a motor vehicle expense business or personal?

Motor vehicle costs are deductible only to the extent of business use, and the method depends on eligibility and recordkeeping.

• Business use: client visits, site travel, business errands
• Private use: commuting home-to-work (generally private), school runs, personal trips

From an ATO-compliance standpoint, a logbook-based business-use percentage is often the most defensible where available.

Can home office expenses be claimed without problems?

Home office claims are legitimate, but the ATO expects methodical evidence and correct categorisation between running expenses and occupancy expenses.

• Separate “working from home running costs” from other household expenses
• Maintain usage calculations (hours, area, power estimates) consistent with ATO guidance

Are meals and entertainment deductible?

Meals are frequently disallowed where they are private in character (e.g., buying lunch while working). Entertainment often has specific denial or limitation rules depending on context and taxpayer type.

• A meal with a client is not automatically deductible; the business purpose and nature of the expense must be established.
• Documentation should clearly state who attended and the business topic (not generic notes).

What about clothing, grooming, and “presentation” costs?

These are commonly private. ATO guidance typically denies conventional clothing even if worn at work, unless it meets specific categories (e.g., protective clothing or occupation-specific uniforms) under ATO positions.

Is a mobile phone and internet expense deductible?

Yes, but only the business proportion. ATO expectations usually include a usage basis (e.g., a representative period) supporting the percentage claimed.

How do you treat mixed-purpose expenses and apportionment correctly?

Mixed-purpose expenses must be apportioned on a reasonable basis, and only the business portion is deductible.

• Motor vehicle: logbook % (or another ATO-accepted method where applicable)
• Phone/internet: itemised billing analysis or representative usage period
• Home office: hours method and/or area method, aligned to ATO guidance
• Subscriptions/software: business use only; private add-ons excluded
• Travel: separate private days from business days; exclude private sightseeing costs

• A sole trader attends a 5-day conference (3 days sessions, 2 days private holiday). Airfare may need careful analysis depending on dominant purpose; accommodation and meals should be split clearly by nights and days. Vague “it was all business” claims without agenda and attendance evidence are routinely challenged.

What records does the ATO expect to substantiate business expenses?

The ATO expects contemporaneous records that establish both the amount and the business purpose. In practice, “proof of payment” alone is not enough for higher-risk categories.

• Tax invoice/receipt showing supplier, date, amount, GST (if relevant)
• Evidence of business purpose:
• Evidence for apportionment:
• For GST-registered entities:

• Mandatory “business purpose” notes on card transactions
• Attachments required for all transactions above a chosen threshold
• Monthly review of suspense and drawings accounts

What happens if personal expenses are paid by the business?

If personal expenses are paid by a business entity, the tax consequences depend on structure (sole trader, partnership, company, trust) and facts.

• Non-deductible expense (denied under ITAA 1997 s 8-1 private/domestic exclusion)
• GST input tax credit denial where the acquisition is not creditable
• Division 7A exposure for companies where payments/loans to shareholders or associates occur (subject to the Division 7A rules in the Income Tax Assessment Act 1936), requiring compliant loan agreements and minimum yearly repayments (MYR) where relevant
• FBT exposure where benefits are provided to employees/directors in an employment context (Fringe Benefits Tax Assessment Act 1986)

• The company pays a director’s private health insurance and school fees. This is generally not deductible, may trigger FBT depending on circumstances, and can also create Division 7A issues if treated as a payment/loan to a shareholder/associate rather than remuneration subject to PAYG withholding.

Disclaimer-worthy note: whether FBT or Division 7A applies is fact-sensitive and must be assessed case-by-case with reference to current ATO guidance and legislation.

How do you keep coding accurate month-to-month (and avoid ATO problems)?

The most reliable control is to prevent mixing at source, then back it up with disciplined review.

• Separate accounts/cards: business-only cards and bank accounts; avoid mixed wallets
• Clear chart of accounts: separate “Owner drawings”, “Director loan”, “Private” categories
• Rules-based coding: standardised mapping rules for recurring suppliers
• Monthly close checklist: review high-risk GLs (motor vehicle, travel, meals, repairs, subscriptions)
• Exception reporting: identify transactions with missing receipts or vague descriptions
• Documentation discipline: require business purpose notes at time of transaction

This is where AI accounting software Australia is increasingly used: automation reduces human error, enforces coding standards, and makes evidence collection systematic rather than ad hoc.

How can automated bank reconciliation reduce misclassification risk?

Automated bank reconciliation reduces misclassification risk by standardising coding, surfacing exceptions early, and enforcing a “review-before-lodge” workflow—particularly for mixed-use expense categories.

In many firms, the operational pain point is that traditional workflows leave coding until BAS or year-end, when memory is poor and records are missing. That is precisely when private spending gets incorrectly claimed.

• Auto-suggest categories based on supplier history and practice rules
• Flag private-like merchants (e.g., supermarkets, family travel providers) for review
• Require attachments and notes before finalising
• Provide an audit trail for adjustments

How does MyLedger compare for controlling business vs personal expenses?

MyLedger is designed for Australian accounting practices and is materially stronger than general small business ledgers when the goal is to minimise private expense leakage while accelerating compliance workflows.

• Automated bank reconciliation:
• Workflow control and review speed:
• ATO integration accounting software:
• Working papers and compliance:
• Pricing model (practice economics):

For firms seeking an “ATO-first” workflow with strong automation, MyLedger’s design aligns to how Australian compliance work is actually delivered (BAS, GST, Division 7A, year-end), rather than how a single small business owner posts day-to-day transactions.

What practical workflow keeps clients compliant without slowing the practice?

A robust workflow is simple: separate, substantiate, review, then lodge.

1. Client education: define what cannot go through the business card (groceries, private travel, school fees).
2. At-source separation: separate bank accounts and cards; establish an “Owner/Director private” pathway.
3. Weekly or fortnightly reconciliation: reduce time-lag and missing receipts.
4. Exception review: focus on high-risk merchants and uncategorised items first.
5. Apportionment updates: update business-use percentages (vehicle, phone, home office) periodically, not at year-end.
6. BAS/GST finalisation: reconcile GST coding and ensure tax invoices held where required.
7. Year-end integrity check: review drawings/director loan accounts, Division 7A position (if a company), and FBT exposures.

Next Steps: How Fedix can help your practice stay compliant

Fedix (via MyLedger) is built in Australia for Australian accounting practices and is designed to reduce private expense leakage while accelerating month-end, BAS and year-end workflows.

• Use MyLedger’s automated bank reconciliation to cut reconciliation from 3–4 hours to 10–15 minutes per client (around 90% faster).
• Implement mapping rules and bulk review to systematically quarantine personal expenses into drawings/director loan categories.
• Leverage deep ATO integration to cross-check obligations and keep lodgements on track.
• Consolidate compliance with automated working papers (including Division 7A management and MYR calculations) to reduce Excel-heavy processes.

Learn more at home.fedix.ai and assess whether MyLedger is the right AI accounting software Australia solution for your practice’s compliance workflow.

Conclusion: Staying on the right side of the tax law

Correctly distinguishing business vs personal expenses in Australia depends on the ITAA 1997 s 8-1 nexus test, careful treatment of mixed-purpose costs, and substantiation aligned to ATO expectations. In practice, the firms with the lowest ATO risk and the highest efficiency separate spending at source, enforce evidence capture, and adopt automated reconciliation and working paper processes to prevent errors compounding until lodgment time.

Frequently Asked Questions

Q: Can I claim an expense if it is partly business and partly personal?

Q: Are home-to-work travel costs deductible for small business owners?

Q: What happens if I put personal expenses through my company?

Q: What records should I keep to defend deductions in an ATO review?

Q: Is automated bank reconciliation acceptable evidence for the ATO?

Disclaimer: This information is general in nature and current as of December 2025. Tax laws and ATO guidance can change, and outcomes depend on specific facts. Professional advice should be obtained for your circumstances, particularly for Division 7A and FBT matters.