The practice of companies owned by family members or startups buying assets which their directors use for personal activities including phones and laptops and tablets and cars and home office equipment has become widespread. The distinction between business assets and personal assets requires proper identification for tax purposes and compliance needs. The chosen structure should reflect the actual usage of assets.
1. The company or director should take ownership of the asset.
You have two straightforward solutions to choose from.
A. The company acquires business assets through direct purchase of these assets.
- The company acquires assets including gadgets and vehicles and equipment through direct purchase.
- The company can deduct depreciation expenses from its business operations under the Income-tax Act.
- The company should exclude depreciation and operating costs for personal usage from its tax return because these expenses do not relate to business activities.
- The method proves most effective when business needs the asset for work activities and the company maintains control over the asset.
B. The company provides financial support to directors for asset acquisition through perquisite payments.
- The company provides financial support to directors through payment of allowances and reimbursement and single-time payments.
- The director purchases the asset through their personal funds.
- The company includes this payment as a business expense for salary and perquisite purposes which becomes taxable for the director.
- The company should not record this payment as a fixed asset because it represents employee compensation.
- The method provides simplicity when the asset serves personal needs extensively and the organization lacks interest in asset ownership.
2. Dealing with mixed personal and business use
- The company should record complete asset costs under business assets when using company-owned assets for both business and personal activities.
- The company should deduct depreciation expenses together with all expenses related to fuel and repairs and subscription fees.
- The company should subtract an estimated amount for personal usage from total expenses at tax time using actual usage data.
- The company demonstrates its intention to obtain only business-related tax benefits from assets which serve dual purposes.
3. GST implications
- The GST registration of the company allows it to claim Input Tax Credit (ITC) for business expenses only when the invoice shows GST in the company’s name.
- The company can either request ITC for the business portion of the asset or request full ITC and then return the personal usage amount according to GST regulations.
- The company must not request GST Input Tax Credit when the director possesses the asset as their personal property.
4. Documentation and policy
- The establishment of board resolutions and internal policies for director asset provision and employee asset provision helps prevent future disputes.
- The company should maintain uniformity between its invoice documentation and asset registration records and usage guidelines.
- The company should implement this approach for all assets that have similar usage patterns including phones and laptops and vehicles and home office equipment.
- A CA consultation to create a standardized policy will protect your organization from future problems when tax authorities conduct assessments.
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