Private company benefits giving rise to a deemed dividend

A deemed dividend may arise when you purchase an asset through your company and it's used for private purposes by a shareholder or their associate. Both the company and recipient of the dividend must record these on their tax returns.

Case study

A director who operated a consulting business claimed they personally competed in a racing network. The company purchased vehicles and claimed over a million dollars in deductions for racing activities over several financial years. They stated the vehicles and activities were used for advertising and to further their business income.

This behaviour attracted the ATO’s attention and they conducted a review of the business. The review found:

  • there were some vehicle and racing expenses associated with running the business; however, the scale of these expenses was disproportionate in comparison to business income
  • the company’s business plan, client base and use of the vehicles were not sufficient to justify that the racing costs were an expense incurred to build a client base
  • the vehicles were owned by the company but stored and used privately by the director.

The ATO determined the company was claiming deductions for a private purpose and not for the purpose of furthering the consulting business.

As a result, the deductions claimed for racing expenses were disallowed and the company had to pay the tax shortfall, as well as interest and penalties.

The private use of the racing vehicles was treated as a deemed dividend on the basis that the company had provided assets for the personal benefit of the director, who was a shareholder. The director was required to include the deemed dividend in their assessable income. Their personal tax returns were amended and they had to pay the tax shortfall, interest and penalties.

Claiming small business tax deductions

Steps Progress

What are deductions and what can I claim?

5 mins

Accounting for private use of assets

9 mins

Expenses you can never deduct

1 mins

Expenses you can deduct over time

10 mins

Stock and asset records

5 mins

Expenses you can deduct immediately

5 mins

Other deductions records

1 mins

Motor vehicle deductions

4 mins

Motor vehicle deductions records

2 mins

Related courses

1 mins

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