Regardless of whether you are a business owner or an employee, purchasing a business vehicle, both situations can increase the overall tax deduction of your company. Small businesses can save a lot by claiming the vehicle’s purchase price, servicing, GST credit, car expenses, and running costs all as taxable expenses.
Motor Vehicle Purchasing Options for Business Purposes
If you are getting a new car for business use, the first things to consider are whether your small business has a steady cash flow to cover the cost of the car. If not there are several financing options to consider.
In Australia, small business owners and sole traders have access to leasing arrangements which can turn a business car from a fixed capital cost to an operational cost over time. Moreover, car loans and chattel mortgages are financing options you could consider as well.
Regardless of which paying option you choose for your business, you should be aware of the fringe benefits tax (FBT), which would take place if the business vehicle is used for personal use by any of the employees.
Finance Leasing (Hire purchase)
A finance lease or a hire purchase allows the business owner full use of the vehicle, however, the financier retains the ownership. The lender purchases the motor vehicle and then leases it to the business. Afterwards, an interest rate is negotiated and repayments based on that need to be made each month until the full price is paid. In the end, the business gets full ownership of the vehicle.
Considering your business needs, the important thing you need to know when purchasing a company car is exactly how much deductible tax there is to write-off.
The Novated lease is an agreement between a financier, an employer and one of their employees. The employer makes a salary sacrifice in making the repayments instead of the employee. All charges are taken from the employee’s pre-tax income. Despite looking like an attractive option, it is best to speak with a consultant before choosing a novated lease as there are other costs and charges aside from that.
Motor vehicles can be purchased through standard financing methods like business loans as well. However, it is important to note that unsecured loans go hand in hand with higher interest rates. In order to keep your interest rates lower, It is a better idea to consider a chattel mortgage instead.
Chattel Mortgage is the most common car financing option in Australia
In Australia, a Chattel mortgage is one of the most commonly used ways for a small business to obtain car finance. It is a financing option in which the financier lends money to the business owner for the purchase and uses the new car as a security mortgage until the loan is repaid. The debt is paid in equally distributed repayments in a certain term. The business becomes the owner of the new car right away, regardless of not yet having repaid the debt.
What is Business Vehicle Depreciation?
Having in mind the potential tax breaks, small business owners should be aware of how to calculate the depreciation of their newly acquired vehicles. Used cars decline in value over time, which basically means that the cost of the vehicle spreads over its effective life. Therefore, you are entitled to use that and claim the cost as a tax deduction.
This method can be used to calculate the amounts you can claim as tax deductions. Under its wing fall two methods, prime cost, or straight-line depreciation, in which the value of your purchased vehicle declines with a constant rate – equally among 8 years.
The other one is the diminishing value method, which uses higher drops in value the first years and slower ones in the later ones, meaning you can get higher tax deductions early on.
Company car‘s effective life
The ATO (Australian Taxation Office) determines a standard rate that can be used in calculations and publishes for how long a car can be used to write-off taxes. Generally, it is for 8 years.
Car Value Ceiling
Some ignorant business owners rush to buy an expensive vehicle under their company name and exploit it for private use, without actually knowing that there is a car value ceiling. 57,581$ is the limit that can be used to deduct taxes as a base cost. Moreover, luxurious cars are taxed in a different manner and would further increase your costs.