Claiming a tax deduction for buying a car for business purposes could save you some tax dollars each year.
However, there’s a common misconception that if you buy a car through your business, it will result in a considerable tax write off.
Often businesses don’t know what they can claim and what they can’t.
One of the biggest misunderstandings that business owners have is that tax laws state that you are only entitled to claim a deduction for expenses that are directly related to earning your income – something that isn’t factored into purchases like cars a lot of the time.
In other words, if the motor vehicle is used for personal use, you can not claim a tax deduction for the personal use portion.
For example, if you’re buying a luxury car like a Lamborghini in your business name. It’s actually a bad decision 9 out of 10 times. Whereas, if you are buying a Ute motor vehicle in your business name – most of the time it’s a good decision.
So, buying a car through a company doesn’t necessarily always result in a significant tax break.
There are various factors a business owner should consider before determining whether buying a car for business purposes is the right choice for you. We’ve put this article together to help guide you in making your decision.
- 1 What Should Business Owners Know About Company Cars and Tax Deductions?
- 2 How Does Your Business Structure Affect Your Tax Deduction Claim?
- 3 How Does the Ownership of a Company Car Affect Your Claim?
- 4 What About Claiming a Tax Deduction for Depreciation?
- 5 How Does Buying a Car for Business Effect GST?
- 6 Key Takeaways
What Should Business Owners Know About Company Cars and Tax Deductions?
According to the Australian Tax Office (ATO), as a business owner, you’re able to claim a tax write off for expenses for motor vehicles used in running your business.
Generally, a business owner can claim the following tax-deductible motor vehicle expenses:
- repairs and servicing;
- depreciation – that is its decline in value;
- interest on a motor vehicle loan;
- registration; and
- fuel and oil.
How Does Your Business Structure Affect Your Tax Deduction Claim?
Claiming a tax deduction for buying a car for business purposes is dependent on how you structure your business.
For example, a sole trader will have to calculate their claim differently from how a company would calculate their claim for motor vehicle expenses.
A. Sole Traders and Partnerships
If you operate your business as a sole trader or partnership, you’ll have to consider the type of vehicle you own as well as how it’s used before you calculate your tax deduction.
Note: if the motor vehicle is used for business purposes and private purposes, you must exclude the private use from your calculation.
Laura operates her business as a sole trader. She owns a car through her sole trader business which she uses to travel between different business premises and clients.
She does, however, use the car to drive her children to school each day and uses it over the weekend for other private purposes.
In her tax deduction claim, she would have to exclude the kilometres used for private purposes.
When determining your tax deduction for a motor vehicle, there are two different calculation methods:
- Cents per kilometre method: the current rate per kilometre is 72 cents, and you can only claim a maximum of 5,000 business kilometres per car. The rate kilometre takes all your running expenses into account, including depreciation.
- Logbook method: if your claim is above 5,000 kilometres, you will need to make use of the logbook method to claim your tax deductions. Your claim will be based on logbook records for the car. For more information on this method, see the ATO’s website.
When determining your tax deduction for all other vehicles, such as motorcycles, minivans and utility trucks, your claim must be based on the actual costs for the expenses incurred, based on receipts.
B. Companies and Trusts
If you operate your business as a company or trust and you’re looking to claim a tax deduction for buying a car for business purposes, you can’t use the logbook or cents per kilometre method.
Instead, your claim will be based on the actual cost of the expenses incurred by travelling between premises, picking up goods or visiting clients. The actual costs will be based on the receipts for the expenses your business incurred.
How Does the Ownership of a Company Car Affect Your Claim?
Further considerations you must keep in mind when claiming a tax deduction is whether your business owns (or leases) the car or if your employee owns the vehicle.
Regardless of whether your business owns or leases the car, you can still claim a tax deduction for its running expenses.
Should you allow any of your employees (or their associates) to use the car for personal use, you may be required to pay fringe benefits tax (FBT).
FBT is the tax payable for benefits received by the employees (or directors and family members). FBT is separate from income tax and thus, is an additional tax expense. Access our small business handbook for more information on how fringe benefits tax may apply to you.
Suppose your employee owns the vehicle, and they use it for business-related purposes. If that is the case, you’ll likely either compensate them for the costs or pay them an additional allowance. You are entitled to claim a deduction for these expenses.
You can’t, however, claim depreciation if your employee owns the vehicle.
What About Claiming a Tax Deduction for Depreciation?
As a vehicle gets older, it is subject to general wear and tear. In other words, each year, the value decreases and thus, depreciates.
To help make the process of claiming tax deductions simpler, the ATO introduced simplified depreciation rules for small businesses. A small business can, thus, choose to either use the simplified depreciation rules or the general rules, depending on what best suits their circumstances.
The simplified small business depreciation rules include:
A. Instant Asset Write Off:
Under the instant asset write off rule, you can immediately claim a small business tax write off for the cost of the business-use portion of the vehicle, in the same year that you first used it.
Generally, the cost of the vehicle would have to be less than the relevant threshold. The threshold has changed numerous times over the past few years.
Up until December 2020:
- the instant asset write off threshold amount for each asset was $150,000, and
- eligibility extended to businesses with an annual turnover of less than $500 million.
However, in response to the effects of the global coronavirus pandemic, the Australian Government updated the Instant Asset Write Off Scheme to allow for an unlimited threshold amount. This means that until 30 June 2022, this limitless instant asset write off will override all other previous instant asset write off schemes.
General Small Business Pool:
According to the small business pool simplified depreciation rule, business owners can claim depreciation deductions on plant and equipment assets, such as company cars, at an accelerated rate.
In other words, small businesses can pool the higher costing business-use assets and claim:
- a 15% deduction in the year that you started using the asset or installed it ready to be used; and
- a 30% deduction each year after the first year.
The ATO proposes that higher cost assets are generally those that cost more than or equal to the relevant instant asset write off threshold.
Remember: if you use the cents per kilometre method, you can’t claim depreciation as a separate tax write off as it is already taken into account.
How Does Buying a Car for Business Effect GST?
Buying a car under your personal name will result in you missing out on claiming GST credit of 10% if your business is registered for GST. Whereas buying the car for business in the company name will give you the opportunity to claim the GST on the car.
Note: the maximum GST you can claim is $5,376.
Another point to note is that buying a car under the company name and then selling it later will result in you having to pay 10% GST on the sale of the car as well.
In this case, however, there is no limit. So, if you purchase a $200,000 car under the business you can only claim GST of $5,376 and if you sell it later for $165,000, you will have to pay GST to the ATO amounting to $15,000.
Before purchasing a car through your company solely for the tax deduction benefit, it’s in your best interest to first consider all these factors and see if the tax circumstances are favourable for you – especially because a significant tax write off isn’t always the case.
You’ll need to consider:
- what portion of the motor vehicle will be for business use and what percentage will be for private use; and
- would there be a possibility that you’ll be liable for fringe benefits tax?
There is no one-size-fits-all strategy because each business owner’s circumstances are different.
Engaging with a tax agent or financial advisor will help you with determining what the best strategy is for claiming a tax deduction for buying a car for business purposes.
If you’re looking for assistance on buying a company car or claiming a tax deduction for an already existing car, Box Advisory Services can guide you in the right direction.
Simply book a free consultation with us or give us a call to discuss your intended purchase to find out if it’s right for you.
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Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your business affairs.