Functioning as a BAS agent, we often receive enquiries about the tax implications and advantages associated with purchasing a vehicle, and it’s crucial to understand that the extent of tax savings and benefits can vary depending on your specific circumstances. To make an informed decision between a sole trader individual and a company, there are several significant factors that you should take into account.
1. In what name should I buy the car? My personal name or my company’s?
If the car is in your personal name, you can claim a tax deduction on the car expenses where the car has been used for business purposes. The ‘logbook method’ or the ‘cent per kilometre’ method is the two standard methods to claim the income tax deduction.
The logbook method can produce a better tax outcome. Still, you must maintain a 12-week continuous logbook (you must keep one every 5 years as long as your circumstances don’t significantly change) and prepare more calculations annually.
The cent per kilometre method allows you to claim a maximum of 5,000 km using a set rate depending on the car’s engine capacity. Unless you are GST registered, you would not be able to claim the GST on the car’s purchase and running costs.
If the company purchases the car, the company should be able to claim 100% of the annual running costs, depreciation, and interest cost. However, fringe benefits tax will need to be factored in. This is a cost the company bears for making the car available for the staff (i.e. you) for private purposes.
The current FBT rule (effective from 1 July 2014) allows the employer to calculate FBT using the ‘statutory formulae’ method, which is currently 20% of the cost of the car; therefore, if the car is owned by the company – depending on the cost of the car – the FBT cost will outweigh the benefits of the car deduction if the car purchase price is very high (this will be outlined in more detail below).
Suppose you use your car predominantly for business purposes. In that case, you will gain a better tax result by applying the ‘operating cost’ method (the FBT will be calculated similarly to the logbook method described above). Still, having a valid logbook for a 12-week continuous period would be best. The ‘operating cost’ method is more time-consuming to calculate as it requires working out the annual operating costs of the car (fuel, insurance, servicing, etc.) and reducing that total amount by the portion of private kilometres travelled compared to the total kilometres for the entire year using the logbook records maintained.
Please note that between now and 30 June 2017, small businesses with a turnover of less than $2m are entitled to claim 100% accelerated depreciation on the car cost providing the cost is less than $20,000 (GST inclusive). This concession is only available to businesses, regardless of the type of structure.
2. Do you want to claim the GST on the purchase and running costs of the car?
The GST-registered entity can only claim GST credits. Regardless of whether you are a sole trader or company, if you are GST registered, you should be able to claim back the GST on the car.
For GST credits on the annual running costs of the car, please note that if you are a sole trader, the GST credit is calculated and capped depending on the car deduction method you elect to use (as discussed above). The ‘cent per km’ method generally produces a less GST credit claim due to the maximum claim of only 5,000km. This limitation does not apply to cars owned by the company as the FBT implication factors in the GST adjusted for the private usage portion.
When selling the car, you must also factor in the GST payable on the car’s market value. For example, if your company purchased a car for $55,000, you would expect to get back $5000 in GST credit. However, if you sell the car in 6 months’ time for the same $55,000, you must pay the $5,000 GST back to the tax office.
3. How does the luxury car limit affect my tax and GST credit claims?
If the car you purchased exceeds the current luxury car limit of $57,466 (for the 2015-2016 income year), your tax deduction and GST credit will be capped at this value. Therefore the maximum car depreciation you can ever claim on the car will be capped at $57,466, and the maximum GST credit allowed is $5,224. Therefore, buying a car over the luxury car limit has no excellent tax or GST benefit.
In addition, when you sell the car, you will be liable for the GST on the market value of the car on sale and not the luxury car cap. For example, if you bought a car for $80,000, your GST credit would have been capped at $5,224 and assuming you later sold it for $70,000, you will be up for a $6,364 GST payment to the ATO and not the GST credit you claimed (i.e. $5,224).
If the company owns the car, FBT will be calculated on the car cost, not the luxury car limit. Therefore, if you purchased a Porsche for $200,000, the FBT will be calculated on this value for both the ‘statutory formulae’ and ‘operating cost’ methods, although you can only claim $57,466 depreciation on the car.
This can be a confusing area, so you should always speak with us before buying that car, especially if the car is going to cost you more than $57,466. Please do not hesitate to contact your client manager.
*Correct as of November 2015
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.