Used your business line of credit for private bills? Here's the tax catch

If you’ve drawn on your business line of credit for something private, the interest on that part generally isn’t deductible, and it doesn’t stop there. The balance becomes a mixed-purpose debt, the interest has to be split, and in a single mixed account every repayment shrinks the business and private portions in proportion. The fix is structural, not a quick repayment.

It happens all the time and for understandable reasons. The facility is right there in the banking app, the school fees are due on Friday, and the personal account is a bit thin until the end of the month. One draw becomes three, and by tax time the bookkeeper is asking awkward questions.

Here’s how the tax treatment actually works, what it means in dollars, and how to set up the facility so it stays a clean business tool.

Why does it matter what the money was spent on?

Because the tax system looks at the use of borrowed money, not the label on the account. The ATO’s list of business operating expenses includes interest on money borrowed to produce assessable income or buy income-producing assets. It also says that when an expense relates to both business and private use, you can only claim the business portion.

The ATO’s ruling on line of credit facilities, TR 2000/2, applies the same idea to revolving facilities. It says deductibility depends on the “ongoing application” of the borrowed funds. Money drawn to pay a supplier, run a pay cycle or cover the BAS keeps a business character. Money drawn for a family car, a renovation or a holiday takes on a private character, and the interest on that slice isn’t deductible.

Two details catch people out:

• Every draw is a new borrowing. The ruling treats a redraw or further drawdown as fresh borrowing, judged on what that new money is used for. A facility that started out pure business can drift into mixed territory one draw at a time.
• There’s no strict tracing exercise, but records still matter. The test looks at what the money was actually applied to. If you can’t show what each draw paid for, you’ll struggle to defend the business share.

How does the interest get split on a mixed facility?

Once a single account holds both business and private money, the interest has to be divided on a fair and reasonable basis. TR 2000/2 describes a method the ATO accepts: take each month’s interest and multiply it by the share of the average balance that was used for business purposes, working from the opening and closing balances for that month.

That sounds fiddly, but a bookkeeper can set it up once in a spreadsheet and roll it forward. The bigger issue is how the split behaves over time.

What you do	What happens to the tax split
Draw for a supplier invoice	Adds to the business portion
Draw for a private bill	Adds to the private portion
Make a repayment into one mixed account	Reduces both portions in proportion to their share of the balance
Make an extra repayment into a separate private sub-account	Reduces only that sub-account
Refinance the mixed debt into two matching facilities	Interest on the business facility can stay fully deductible

Can’t I just pay the private part off first?

This is the question almost everyone asks, and the answer is usually no. The ruling says that where a facility is one mixed sub-account, the borrower can’t choose to direct repayments to the private portion. A repayment reduces the business and private portions according to their share of the debt at the time.

The ATO’s guidance on mixed-purpose loans makes the same point in a property setting: once a loan is split, the ratio carries on for the life of the loan, and you need to separate the interest on private funds from the rest.

The practical result is that a private draw can keep shaving the deductible interest for a long time, especially on a facility that’s rarely cleared to zero. Many working capital lines run at a fairly steady balance for months, which is exactly when the problem lingers.

There are two legitimate ways out. If the facility has separate sub-accounts, you can direct extra repayments to the private one. And the ruling recognises that refinancing a mixed debt into two separate accounts, one matching the business portion and one matching the private portion, keeps the interest on the business account deductible.

What does this look like for a real business?

Illustrative example. A landscaping business has a $100k unsecured line of credit. Over the spring rush it draws $80k for plant hire, materials and wages. In the same months the owner draws $20k to cover a car upgrade and a family trip, intending to “sort it out later”.

The balance is now four-fifths business and one-fifth private. Each month the owner pays $10k back into the same account. Because it’s one mixed account, only $8k of each repayment reduces the business portion; the other $2k comes off the private side. The private slice stays at roughly one-fifth of whatever’s left, and so does the non-deductible share of the interest.

The owner’s accountant suggests two changes. First, stop all private draws and pay the private bills from the owner’s own account. Second, ask the lender whether the facility can be split into sub-accounts, or refinance the private $20k into a separate personal arrangement, so the business line goes back to being purely business. From that point the bookkeeping is simple again: every dollar of interest on the business line relates to business use.

If you’re sitting on a facility like this and want to talk about a cleaner structure, start a short enquiry and tell us what the line is really funding. No credit check happens at that first step.

Does it matter whether I’m a sole trader or a company?

It changes who owns the debt and who claims the deduction, but not the core idea. A sole trader borrows personally, so the line of credit is theirs and the split happens in their own return. A company or trust borrows in its own name, and its deductions depend on how the entity uses the money.

When a company facility pays a director’s private bills, it raises a separate set of questions about how that payment is treated between the company and the director. That’s worth a five-minute conversation with your accountant before it becomes a habit, not after. The type of entity also affects how lenders structure security and guarantees, which our page on business lines of credit walks through.

How do I keep the facility clean from here?

A handful of habits do most of the work.

1. Pay private costs from a personal account. If the business needs to pay you, pay yourself a wage or drawing first, then spend it personally.
2. Write a purpose note against every draw. “Timber order, invoice 4471” takes ten seconds and settles any question later.
3. Use sub-accounts if your lender offers them. One for working capital, one for anything else, and never mix them.
4. Fix an existing mixed balance by refinancing, not by targeted repayments. Ask your accountant to confirm the private amount, then move it out.
5. Choose the right tool for the job. A line of credit is built for recurring business gaps. A one-off business purchase may sit better on a term loan, and an everyday account float may suit a business overdraft.
6. Clean up before you apply for more. Lenders read your statements. A facility that pays school fees and holidays tells them the limit is funding a household, not a business.

Your accountant may also want to compare your margins against peers when they review the books. Our guide to ATO benchmarks and business loans explains how those comparisons work.

Would a business-only facility make life simpler?

Sometimes the cleanest fix is a fresh facility sized properly for the business, so private bills never have a reason to land on it again. Unsecured and cash-flow lines of credit typically run from $5k to $500k and are sized on turnover and bank statements. If you own property, a property-secured facility from $20k to $5m can open up a larger limit for genuine working capital.

The enquiry takes about 60 seconds, and there’s no credit check when you first enquire. We don’t send your details to a pile of lenders, so your phone won’t light up with strangers. A real person looks at how your business actually uses credit and calls you to talk through options. Please answer the form accurately, including what the facility is really for, so we can match the right structure first time.

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