Buying A Car – Critical Factors in Making The Best Decision for You and Your Business?

A common question from small business owners is whether they should buy a car in their business name or their personal name. It’s never a standard answer and it will depend on several factors including price, operating costs and how the car is used. Usually, the question is where can I save the most tax? I will get to the tax benefits shortly but there are several other things to consider:

How will I use the vehicle?

How the vehicle will be used is the first factor that should be addressed. Do you legitimately use a vehicle in your business or is it primarily for business? If the answer is no and you really are just using the car to pick up the kids or for leisure on the weekends and business use is incidental, then buying the car in the business name may create more hassle than it's worth. It would be fantastic if we could get our business to buy the family car, claim the GST, and get the tax deductions but it is important to understand that if your business doesn’t really need or use a car to generate its income you will just increasing the cost of running your business when dealing with FBT or potential Div. 7A loan issues.

We recommend that BEFORE buying a car you have a logbook estimate to assist in understanding the tax consequences. We also STRONGLY recommend that an actual logbook is kept post-purchase. The ATO can easily eliminate legitimate vehicle claims based on a non-complying logbook.

Tax Benefits

There are tax benefits associated with both buying personally and buying in your business. When owned in a personal name the only two methods are:

• Logbook method

• Cents per kilometre method

Logbook Method

If you use the logbook method, your logbook needs to show your work-related trips for a minimum continuous period of 12 weeks. This will give you a percentage of work use for the vehicle. This is the amount of your actual expenses that you can claim as a deduction. Under the logbook method:

• Your claim is based on the work-related portion of your actual expenses for the car.

• Expenses include running costs and decline in value but not the cost of purchasing the car

To work out your work-related use, you must have a valid logbook with odometer readings for the start and end of the logbook period during the income year and for each income year you rely on your logbook (you can rely on the logbook for 5 years).

You can claim fuel costs as per:

• actual receipts

• estimate of your expenses using the odometer records that show readings from the start and the end of the period you had the car during the income year.

Cents per kilometre method

Under the cents per kilometre method:

• A single rate is used - 78 cents per kilometre from 1 July 2022 for the 2022–23 income year

• You can claim a maximum of 5,000 business kilometres per car.

• To calculate your deduction, multiply the number of business kilometres you travel in the car by the appropriate rate per kilometre for that income year.

This will be a maximum deduction of $3,900 for the 2023 tax year.

Owning in a Company or Trust:

When owned by a Company (or Trust), the actual costs method must be used to determine what is deductable to the business. You can only claim the percentage of the actual costs that relate to the business use of the vehicle. Therefore, if a vehicle is used for both business and private purposes, you must keep records that allow you to work out the business-use percentage. If the vehicle is used for private purposes, you will need to contribute into the company to avoid paying any Fringe Benefit Tax. Fringe benefits tax can also be avoided if purchasing vehicles that are exempt vehicles. So, what is effectively deductible is the costs paid less this contribution for private usage. To deter individuals from buying a car with mostly private use in a company or Trustee, unless a logbook has been prepared, the deemed private usage will be an amount equal to 20% of the cost price of the car (the cost price of the car is reduced by 1/3 after owning it for 4 years).

The company will be able to deduct costs such as depreciation, all operating costs (fuel, repairs, registration, insurances etc), interest on finance of the vehicle and in addition to that, if registered for GST, claim the GST input tax credit on the vehicle cost and some of the ongoing operating costs.

Depreciation

When using the actual cost method, you can claim a deduction for capital expenses, such as the purchase price of a motor vehicle, over a period. This is known as depreciation or a decline in value. Using a diminishing value method, the deduction will be higher in the earlier years and taper off in later years. Depreciation is designed to spread the deduction over the useful life of the Motor Vehicle. There is a limit on the motor vehicle capital value that can be depreciated, the maximum value you can use for calculating your claim is the car limit for 2023 is $64,741.

You may be eligible for an immediate deduction or an accelerated rate of depreciation under one of the tax depreciation incentives such as temporary full expensing or Instant Asset Write off.

There can be situations where low cost, low business use cars are better off owned in the business when factoring in the FBT. An example of this may be a company owned vehicle costing $5,000. The FBT on this would be $1000 per year, yet all rego, fuel & maintenance etc would be a legitimate claim for the business.

An alternate situation may be a low business use $150,000 Land Cruiser SUV. The Stat Method would produce an FBT of $30,000. We would also be limited in our overall depreciation and GST claim, yet on disposal would still be subject to paying GST on the full sale price.

Electric Vehicles

The federal government has proposed a law that will make Electric Vehicles costing less than $84,916 FBT Exempt. Requirements will be:

• The car is a ‘zero or low emissions vehicle’ (Battery Electric, Plug in Hybrid or Hydrogen Cell electric)

• The value of the car at the first retail sale (i.e., purchase price) was below $84,916 for 2022-23, which is the luxury car tax threshold for fuel-efficient cars

• The car was first held and used on or after 1 July 2022.

• The vehicle is provided in respect of employment.

The benefit exempted from FBT is the private use of the vehicle, including any associated costs of running and maintaining the car for the period the car fringe benefit was provided.

Cash or Finance?

Another factor to consider is how you are planning (or can) fund the purchase of the vehicle. If you are planning to get finance, you need to consider the borrowing ability of both the business and you personally and the options available.

How healthy your balance sheet and cash flow will impact the decision on how to finance a vehicle. If you pay cash now, funds will be tied up meaning a potential shortfall later Financing the car smooth’s out the cash flow impact and should be weighed up against the interest cost.

Summary

If you are considering the purchase of a motor vehicle and are not sure which structure it should be purchased in, reach out to one of Fox Group’s expert Business Accountants who can work it through with you. Modelling this and getting this decision optimised can literally mean tens of thousands of dollars in savings over the life of a vehicle. Also, chat to us about how to fund the purchase. We can help you to understand your cash flow requirements and assist in making the finance application a smooth process.