Published: October 2025
Mixing personal and business finances is one of the most common bookkeeping mistakes made by Australian small business owners. It usually starts innocently - using your business card to pay for groceries because it's convenient, or covering business expenses from your personal account when cash flow is tight.
This practice, formally known as commingling funds, creates significant problems for your bookkeeping, tax compliance, and even legal protection. Understanding the implications and knowing how to fix the situation is essential for every Australian business owner.
Commingling funds occurs when you mix personal and business finances instead of keeping them separate. This happens in several ways:
For sole traders, the line can seem blurry since you and your business aren't legally separate entities. However, even sole traders benefit from keeping finances distinct for clarity and compliance.
For companies, trusts, and partnerships, commingling creates more serious problems because these structures exist as separate legal entities from their owners.
Before judging yourself too harshly, understand that many business owners commingle funds for understandable reasons:
When you're busy running a business, using whichever card is in your wallet feels easier than thinking about which account to use. The business credit card is often the highest limit, making it tempting for larger personal purchases.
When business cash flow is tight, owners often use personal funds to cover business expenses, planning to reimburse themselves later. When personal finances are stretched, the reverse happens - business accounts cover personal needs temporarily.
Many new business owners simply don't realise they should keep funds separate, especially sole traders who think "it's all my money anyway."
In the early days, when your business barely generates income, maintaining separate accounts can feel like unnecessary complexity. You might think you'll sort it out "once the business gets bigger."
Regardless of the reason, commingling creates problems that compound over time.
When personal and business transactions mix, bookkeeping becomes enormously complicated.
How profitable is your business really? When personal expenses appear in business accounts and business expenses in personal ones, calculating true profit becomes guesswork rather than fact.
This makes it impossible to make informed decisions about pricing, hiring, investing, or planning for growth. You can't manage what you can't measure accurately.
Bank reconciliation becomes a nightmare when accounts contain both business and personal transactions. Your bookkeeper or accountant needs to review every transaction to determine which category it belongs to, dramatically increasing the time and cost of maintaining your books.
When business expenses run through personal accounts, they're easily missed at tax time. You lose deductions you're entitled to, paying more tax than necessary. Even if you find the receipts later, reconstructing what was business versus personal months or years later is difficult.
Every minute spent explaining to your bookkeeper whether a transaction was personal or business is time not spent growing your business. This administrative burden compounds across hundreds of transactions annually.
The Australian Taxation Office takes a dim view of commingled accounts, particularly during audits. Several compliance problems arise:
The ATO requires proper evidence to support tax deductions. When business expenses mix with personal ones, proving what's legitimately deductible becomes much harder. The ATO may disallow deductions if you can't clearly demonstrate they were for business purposes.
If you're registered for GST, commingled accounts complicate your Business Activity Statement calculations. You need to correctly identify which expenses include creditable GST and which don't. Personal expenses don't qualify for GST credits even if purchased through business accounts.
Mistakes here can lead to underpayment or overpayment of GST, both of which create problems. Underpayment means interest charges and penalties. Overpayment means you've given the ATO money they didn't need, hurting your cash flow.
Your business income must be accurately reported. When business revenue deposits mix with personal deposits (like gifts, personal loans, or asset sales), distinguishing between taxable business income and non-taxable personal receipts becomes difficult.
The ATO may question whether you've accurately reported all business income, particularly if your bank deposits exceed your declared revenue.
Australian businesses must maintain proper financial records for at least five years. Commingled accounts make it nearly impossible to meet this requirement comprehensively. If the ATO audits your business, they expect clear records showing business income and expenses. Mixed accounts fail this test.
For companies and trusts, commingling creates potential Fringe Benefits Tax (FBT) liability. This is one of the most serious and expensive consequences.
FBT is a tax on employers who provide benefits to employees. If your company pays for your personal expenses, the ATO treats this as a fringe benefit provided to you as an employee/director.
Common examples include:
FBT is calculated at 47% on the grossed-up taxable value of benefits provided. This means if your company pays $10,000 of your personal expenses, the FBT liability could be over $9,000 depending on whether GST applies.
This effectively doubles the cost of the personal expense - you've spent the money personally, and the company must pay substantial tax on top.
To calculate FBT correctly, you need detailed records of what expenses were personal versus business. Commingled accounts make this determination nearly impossible without extensive reconstruction.
During an FBT audit, the ATO expects clear documentation supporting your calculations. If you can't demonstrate what was business and what was personal, they may assess FBT on amounts you believe were legitimate business expenses.
Some FBT exemptions and reductions require detailed records. For example, if you maintain a logbook showing your car was used 80% for business, only 20% of the car expenses create FBT liability. Without clear records, you lose these benefits and pay maximum FBT.
If you operate through a company, commingling triggers Division 7A concerns. This complex area of tax law treats certain company payments to shareholders or associates as deemed dividends.
When company funds pay your personal expenses without proper documentation, the ATO can treat these payments as Division 7A dividends. This creates a tax liability for you personally on income you didn't actually receive as a dividend.
To avoid Division 7A issues, any money taken from a company for personal use must either:
Simply mixing personal and business expenses without documentation creates presumed Division 7A dividends, with tax consequences for the shareholder.
For companies and trusts, one of the major benefits of these structures is limited liability protection. Your personal assets are protected from business debts because the company or trust is a separate legal entity.
However, commingling funds can destroy this protection through a legal doctrine called "piercing the corporate veil." If you treat the company or trust as indistinguishable from your personal finances, courts may decide it should be treated that way for legal purposes too.
This means if your business faces legal action or bankruptcy, creditors might successfully argue they should be able to access your personal assets because you never treated the business as truly separate.
Maintaining distinct finances is crucial for preserving the liability protection that justified setting up a company or trust in the first place.
If you've been commingling funds, don't panic. Many businesses have faced this situation, and there are steps to fix it.
If you operate through these structures, consider whether you need to:
These decisions have significant tax implications, so seek professional advice before acting.
Once you've identified and corrected past transactions, update your accounting records to reflect the true picture. This might mean adjusting:
Create simple rules to prevent future commingling:
Fixing significant commingling problems is complex and has important tax consequences. Consider engaging professional help:
A professional bookkeeper can review your accounts, properly categorise all transactions, and set up systems to prevent future problems. They understand how to reconstruct financial records and create the documentation necessary for compliance.
Your accountant should be involved if you need to:
If commingling affected your GST reporting, a registered BAS agent can help recalculate your BAS obligations and amend previous returns if necessary.
The cost of professional help is much less than the potential penalties, interest, and additional tax from getting it wrong.
Avoid commingling problems with professional bookkeeping
Scale Suite provides comprehensive bookkeeping services that prevent commingling issues from the start and help fix existing problems efficiently.
Our Sydney-based team offers:
We work with Australian businesses at all stages, from startups needing proper structure from day one to established businesses fixing historical commingling problems.
As registered BAS Agents and certified partners with Xero, QuickBooks, and MYOB, we deliver the expertise you need to maintain compliant, accurate financial records.
We integrate seamlessly with your accountant to ensure your tax obligations are met and your business benefits from proper financial separation.
Book a free consultation to discuss how Scale Suite can help establish or restore proper financial structure to your business.
Is commingling funds illegal in Australia?
Commingling isn't automatically illegal for all business structures, but it creates significant tax compliance problems and can violate directors' duties for companies. For sole traders, it's not illegal but makes proper tax compliance very difficult. For companies and trusts, it creates more serious issues around FBT, Division 7A, and potential piercing of the corporate veil.
Can I just use one account if I'm a sole trader?
While legally permitted for sole traders since you and your business aren't separate legal entities, using one account creates enormous bookkeeping difficulties and makes accurate tax reporting nearly impossible. The small inconvenience of separate accounts is far better than the chaos of mixed finances.
What if I've been commingling for years?
Start separating your finances immediately going forward. For past years, work with your accountant and bookkeeper to determine whether you need to amend previous tax returns. The statute of limitations for ATO amendments is typically four years, but can be longer in cases of fraud or evasion. Fix the current year and at least the past two years as a priority.
How do I take money out of my business properly?
For sole traders, you can simply transfer money as "drawings" (not a deductible expense). For companies, pay yourself a proper director's fee or salary with PAYG withholding, or declare dividends with appropriate franking. For trusts, distributions must follow the trust deed requirements. Your accountant should advise on the most tax-effective method for your situation.
Can personal use of business assets trigger FBT?
Yes, if you're a company or trust employer. Personal use of company cars, business credit cards for personal purchases, and using business assets for private purposes can all create FBT liability. Sole traders don't pay FBT but may lose deductions for private use portions of expenses.
What if I can't remember whether old transactions were personal or business?
Do your best to reconstruct the records using available documentation like receipts, calendar entries, emails, or other evidence. If you genuinely can't determine the nature of a transaction, the conservative approach is to treat it as non-deductible for tax purposes to avoid ATO penalties for over-claiming deductions.
Will commingling trigger an ATO audit?
Commingling doesn't automatically trigger audits, but if you are audited, commingled accounts make the audit longer, more complex, and more likely to result in adjustments. The ATO pays close attention to businesses where bank deposits significantly exceed declared income, or where personal and business expenses appear mixed.
How much does it cost to fix commingled accounts?
This depends on how long the problem has existed and how complex your finances are. Expect to pay bookkeepers $500 to $3,000 for cleaning up a year of commingled transactions, plus accountant fees if tax amendments are needed. While this seems expensive, it's much less than potential ATO penalties and interest for non-compliance.
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