Should you buy a Company Car
Buying a car under the company normally allows for a healthy GST refund and tax savings. However, there is a common misconception that buying a company car will result to huge savings in tax. The rule is you are entitled to claim a deduction for expenses that are directly related to earning your income. In other words, if the car is used for personal use you can not claim a tax deduction for the personal use portion. In fact, if the company is paying for the full use of the car including the personal use, the business will be liable for fringe benefit tax instead. Which means that you just made your business eligible for more tax to pay!
The point is that buying a company car does not necessarily mean less tax to pay.
What is fringe benefits tax?
FBT is a 49% tax payable by the company for benefits received by the employees (or directors and family members). This tax is separate from income tax and thus, is an extra tax the company is required to pay on top of income tax.
So what does this mean?
Basically, by purchasing a company car for tax savings it has resulted to the company paying FBT of 49% for the private use of the company car.
Buying a business car under your own name?
Buying a car under your personal name will still allow you to claim the tax deductions for the business use portion under your personal income tax return. The business will also avoid paying any fringe benefit tax on the car as long as the cars running cost is paid personally. If you are earning income at the highest income tax rate of 49 % (including levies), then you will have a higher saving of tax as opposed to the 30% tax rate in companies as well.
So should you not buy a car under your company name?
The situation varies for all clients. We can not simply give you a guide on this as each individual client has different circumstances. Certain factors can influence our advice which are:
- The private and business use proportion of the car
- Does the car purchase include GST?
- The type of car. Is it designed for the principal purpose of carrying passengers?
- The carrying load capacity of car
- The business activity of the company
- Who is the company car for?
- Where is the company car is parked after work hours
- FBT exempted motor vehicle?
- Employee contracts and agreements
- Reimbursement of employee’s expenses relating to the car
- Does the employee require a company car?
- Value of car
- The expected taxable income of the car users
- Expected net taxable income of company
It is best to go over the different factors above and list down your circumstances for your accountant. A quick call to your accountant or Box Advisory Services will help you make the right decision for your business. Our point is ‘Don’t buy the car without speaking to your adviser’. It could cost you a lot in taxes in the long run.