Tax Essentials: Motor vehicles
In this post we're going to look at one of the most common questions asked of accountants by their business-owner clients - how do I go about buying a new car in the business?
Let’s break it down …
1. Should I buy a new car?
Your accountant can’t really answer this one! First thing to remember is that a tax deduction is great (saves you 25 cents!), however it’s not as great as keeping the cash in the company bank account (75 cents after tax), so the first question is to ask whether you really need/want a new car. If the answer is yes, we then look at how to make is as tax effective as possible.
2. Who should by the car?
Once you’ve made the decision to buy a new car, you’ll want to then look at what name the car should be registered in (i.e. who will own the car?). Most business owners will have two options here. They could buy the car in the name of their company or they could buy the car in their personal name.
The answer as to which is best can be difficult to answer (how long is a piece of string?), but as a simple guide you’ll get greater benefit having it in the company if you have a great logbook (see below) and/or if you’re already earning over the top marginal rate threshold (currently $180,000) in your personal name. For those with low work-related usage it tends to make more sense to own the car personally and simply get a motor vehicle allowance or something similar paid from your company because having it in the company name may lead to FBT issues which we’re sure you’d rather avoid.
What’s a logbook? It can be created using an app or via the traditional paper book available from a newsagent and it details the vehicle usage over a 12 week period. It will show all the private and business use of the car over the period which allows you to then calculate, based on this nominated period, what the work-related percentage usage and what the private usage percentage is. The higher the work-related percentage the greater the amount of vehicle-related costs you’ll be able to claim a tax deduction for.
3. How should I pay for the car?
Finally, we need to look at how you’ll actually pay for the vehicle. If you’ve got the cash to pay for the car (i.e. it is surplus to requirements now and into the future) and you’re not able to invest it in something (e.g. term deposit, capital expenditure in the business, etc.) that returns a higher percentage than what the finance company will charge you to finance the car, then just pay for it in cash.
If paying in cash doesn’t work for you then there are a variety of finance options which should be reviewed with your particular circumstances in mind. Typically a chattel mortgage can work well and we generally advise to avoid a balloon repayment at the end so that when the lease is up you actually own the car. Also remember to shop around for a good interest rate and low setup costs – there are plenty of lenders out there so don’t feel you have to use the one at the dealership. Legislation also typically allows for the GST on the vehicle to be claimed up-front regardless of the method of finance used, though remember that the GST you can get refunded is subject to a limit of a bit over $5,000.
As always, the above is intended as a guide only and isn’t to be taken as advice. If you’re interested in buying a car for your business and would like to know the tax implications specific to you, please get in touch today. We’d love to help.