Author: Wendy Waack, Partner, TAG Financial Services
We get a lot of questions about claiming motor vehicle expenses and the cost of a new car. Although the answers can be complex, here are the three most common questions and the key considerations to making a good financial decision.
1..How do I claim my motor vehicle expenses?
If you use your motor vehicle for work related purposes, the following 2 methods can be used to calculate your deduction:
Cents per kilometre
- A set rate for each business kilometre.
- Claim to a maximum of 5,000 business kilometres.
Logbook method
- Based on the business use percentage as per the logbook records.
- Odometer readings are required at the start and the end of the period.
- Written evidence of expenses is required.
Ensure your logbook is up to date. Recently, the ATO has allocated their resources to audit investigations, particularly on substantiation records and logbook.
2. Can I claim my new car under the instant asset write-off provisions?
If your business is eligible to claim the instant asset write-off, you will need to consider the car limit. The car limit is the maximum depreciation expense you can claim for a car.
The car limit applies to the cost of some passenger vehicles. It applies to passenger vehicles designed to carry a load less than one tonne and fewer than nine passengers. It does not apply to motorcycles or similar vehicles, or to vehicles fitted out for use by people living with a disability.
The car limit is:
- $57,581 for the 2019–20 income tax year.
- $59,136 for the 2020–21 income tax year.
Here are some tips to help you get it right:
- If the car limit applies to your vehicle, you can only claim a deduction for the business portion of the car limit.
- To use the instant asset write-off, you must have used your vehicle or had it delivered ready for use by 30 June 2022.
Example:
| Cost of car purchase | $100,000 |
| Business usage | 75% |
| Car limit | $59,136 |
| Deduction amount | $44,352 (75% of $59,136) |
3. Is it a good idea to buy a motor vehicle in my business?
The cost of the car and the business usage determines the answer to this question. There is no one size fits all answer. Issues such as GST and Fringe Benefit Tax (FBT) need to be considered.
GST
Taxpayers like to receive the GST refund on their purchase of a motor vehicle. It is often assumed that a motor vehicle purchase of $100,000 will result in a refund of GST of $9,090.
Example continued:
The GST claimed back on the purchase would be $4,032 (GST on the cost limit of $59,136 x the business use of 75%).
This sounds good so far – with a nice return.
FBT
As the individual is receiving a benefit, FBT would be payable.
Example continued:
The FBT taxable amount on the car for at least 5 years would be $20,000 under the statutory method.
You can make a contribution towards this taxable benefit but that would mean GST would be payable on the amount. That is, the Government would receive another $1,818 in GST each year of ownership.
And of course, when you sell it, you pay GST on the proceeds of sale. Starts to sound complicated, doesn’t it!
The alternative is to use the operating method (commonly referred to as the “logbook method”) for calculating FBT. This would require you to document all expenses and the calculation is done on costs plus deemed depreciation limit and imputed interest. The FBT taxable value would be the private portion of these costs.
It is a mathematical calculation of value, but here is the sting in the tail. While all benefits to you are calculated on the reduced motor vehicle cost limit i.e. $59,136 this operating cost method is calculated on the total cost of the car inclusive of GST.
Example continued:
The depreciation cost would be 25% of $100,000 and the imputed interest would be 4.8% of $100,000.
This method is advantageous when the car has a high business usage.
Additional Loan Issue
In conjunction to the GST issue, there is a need to contribute to the taxable value in ‘after tax dollars’ by drawing on that credit loan account – and let us not start with the issues around a debit loan account!
The moral of the story is when considering purchasing a motor vehicle – do the maths! If you can justify a logbook for a high business use, the purchase of a car in the business entity may be of benefit. It is a numbers game. Please feel free to contact your TAG Advisor to discuss further.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Add to the end: Copyright 2021. Please do not reproduce without the expressed written consent of the author.