What you need to think about before buying a new vehicle for your business
- Leonie Martin
- May 5, 2022
- 8 min read
Updated: 2 days ago
Purchasing a new vehicle for your business can be an excellent way to improve efficiency, meet client demands, and even benefit from some valuable tax deductions.
But before you head to the dealership, it’s important to understand how the purchase will impact your business finances, including instant asset write-off limits, GST credits, and depreciation rules for the 2024–25 financial year.
Work out the primary use of the vehicle
All vehicles are a major outlay, so it’s important to ensure you pick the right type of vehicle to suit your business needs. For example, if you only need a car for short trips to carry documents or visit clients, a small, compact car may be the best option. If you’re a tradie or need to transport a lot of equipment or bulky tools, then a ute or van might be a better choice. Also, consider whether the vehicle will be used for city driving, highway travel, or off-road conditions — this will determine whether you need 4WD capabilities.
If you plan to use the vehicle solely for work purposes, it generally makes sense for the business to own it directly. However, if the vehicle is likely to be used for personal activities — like school runs or supermarket trips — you may be better off claiming the business-use percentage instead of buying it entirely through the business. This is important for tax deductions, as only the business-use percentage is deductible.
Buying a New Vehicle or used
One of the first decisions to make is whether to buy new or used. Each option has its benefits and drawbacks:
Buying New
Higher purchase price and insurance costs, but comes with better reliability, the latest safety features, and new car warranty periods — sometimes up to ten years or based on distance travelled.
Bigger tax deduction for depreciation in the early years under the small business pool, with 15% claimable in the first year and 30% each year after.
Potentially higher residual value when you replace it, especially if well-maintained.
Remember: The depreciation cost limit for the 2024–25 financial year is $69,674, which means even if you spend more on the car, the maximum amount you can claim for depreciation is $69,674. The maximum GST credit you can claim is $6,334 (one-eleventh of the limit).
Buying Used
Lower initial cost and generally cheaper insurance premiums.
However, you may have less knowledge of the vehicle’s condition, and warranties are often shorter. If purchased privately, there is no warranty.
Potential for higher maintenance costs and lower residual value.
How Long Will You Keep It?
If you plan to keep the vehicle long-term, buying new with a high residual value and strong warranty may be worth the extra cost. If it’s only for occasional use, a well-maintained used vehicle can be a smarter financial choice.
👉 Tip: Always read the fine print when considering warranties, especially if they are based on time frames or distance travelled, to see if they align with how you intend to use the vehicle.
Buy it outright or finance
If you’re a good saver, you might have the cash to pay for your new car outright. Doing this means you won’t be paying any interest, so it should ease your long-term cash flow.
However, you need to consider if that’s the best use of your business cash reserves — it might be better to keep that capital available for working capital needs. If you don’t have access to the full amount in cash, financing may be a good option. Here are the main finance options available and their implications for tax and ownership:
Hire Purchase
You pay to ‘hire’ or rent the car over a lease period, with the option to buy it at the end.
The lender remains the legal owner until the final payment.
You can claim the interest portion of the payments and depreciation on the vehicle.
Chattel Mortgage (Goods Loan)
You borrow money to buy the car, and you are the legal owner from day one.
The vehicle is used as security for the loan.
Allows you to claim GST upfront, along with interest and depreciation deductions.
Small Business Loan or Personal Loan
You borrow money from your bank or lender, and you own the vehicle.
The loan can be secured against the car or unsecured (though unsecured usually comes with a higher interest rate).
Repayments are deductible if the vehicle is used for business purposes.
Lease Operating or Finance Lease
The lender owns the vehicle and leases it back to you.
Lease payments are deductible, but you can’t claim depreciation since you don’t own the car.
At the end of the lease, you can:
Pay the residual (balloon payment) to own the vehicle.
Upgrade to a new lease and start fresh.
Methods for Claiming Vehicle Expenses
When claiming deductions for your business vehicle, you have two main options:
1. Cents per Kilometre Method
The cents per kilometre rate for the 2024–25 financial year is 88 cents per kilometre. You can claim up to 5,000 business kilometres per car without needing a logbook. This method covers all running costs, including fuel, maintenance, and depreciation.
✅ Simple and requires minimal record-keeping.
🚫 Maximum of 5,000 km claimable, which may not cover high business use.
2. Logbook Method
If your business travel exceeds 5,000 km a year, the logbook method may provide a bigger deduction. This method requires you to:
Keep a logbook for 12 continuous weeks to determine your business-use percentage.
Record start and end odometer readings for each business trip.
Maintain receipts for
fuel and oil
maintenance costs, such as routine servicing and repairs
insurance premiums - comprehensive insurance and green slip
registration cost
membership fees, such as road-side assistance
interest on finance and
other running costs.
The logbook is valid for five years as long as your business use doesn’t significantly change.
✅ Allows you to claim the actual business-use percentage of expenses.
🚫 Requires more detailed record-keeping.
For most businesses, the logbook method vehicle expenses will result in the biggest deduction.
Depreciation or simplified depreciation or instant asset write off
This is where things get complicated!!
Under the capital allowance rules, a vehicle is considered a depreciating asset. This means its value declines over its effective life as it’s used for business purposes. The cost of each eligible capital asset is written off over time, based on how long it would typically be used to generate income, taking into account wear and tear and the need for eventual replacement.
General Depreciation Rules
If your business vehicle does not qualify for simplified depreciation or the instant asset write-off, it falls under the general depreciation rules. The ATO sets specific rates for different types of assets, based on their effective life. For motor vehicles, the standard depreciation rate is 25%, meaning the cost of the vehicle is claimed over approximately four to five years.
If you choose to use the ATO’s effective life rates, you claim:
25% per year for vehicles
This continues until the full cost (up to the depreciation cap) is written off.
However, the deduction is only for the business-use percentage of the car. This is where logbook records are crucial.
The Logbook Method and Business-Use Percentage
To claim vehicle expenses and depreciation accurately, you need to determine the business-use percentage of the vehicle. This is done using the logbook method:
You must keep a logbook for 12 continuous weeks to record your business and personal travel.
The logbook should include dates, odometer readings, start and finish locations, and the purpose of each trip.
This percentage remains valid for five years, unless your business usage changes significantly.
Example:
If your logbook shows that 60% of your vehicle use is business-related, you can only claim 60% of the depreciation, running costs, and GST credits.
Simplified Depreciation Rules (Small Business Pooling)
If your business has an aggregated turnover of less than $10 million, you can choose to use the simplified depreciation rules, which include a small business pool.
For the 2024–25 income year:
Assets costing $20,000 or more are added to your small business pool.
You can claim:
15% deduction in the first year
30% deduction each year after
If the balance of your pool is less than $20,000 at the end of the financial year, you can write off the entire amount.
Example:
If you purchase a vehicle for $40,000 and your logbook shows 50% business use, the mount added to the small business pool for depreciation is $20,000 (50% of $40,000).
Instant Asset Write-Off for 2024–25
The instant asset write-off threshold for the 2024–25 financial year is $20,000. This allows eligible small businesses with a turnover of less than $10 million to immediately deduct the business portion of the cost of any eligible depreciating asset costing less than $20,000.
To qualify:
The vehicle must be first used or installed ready for use between 1 July 2024 and 30 June 2025.
If the cost is $20,000 or more, it will not qualify for an instant write-off and will need to be added to your small business pool for standard depreciation.
Example:
If you buy a $19,000 small van and use it 70% for business, you can claim $13,300 (70% of $19,000) as an immediate deduction under the Instant Asset Write-Off.
Car Depreciation Cost Limit for 2024–25
One important consideration when claiming deductions for business vehicles is the car depreciation cost limit. For the 2024–25 financial year, this limit is $69,674.
What does this mean?
If your business buys a car that costs more than $69,674, you cannot claim depreciation on the amount above that limit.
For example, if you buy a car for $85,000, the maximum you can depreciate is $69,674, even if the purchase price is higher.
Your business-use percentage still applies. If the car is 60% business use, your depreciation claim would be 60% of $69,674, which is $41,804.
This limit also affects your GST claim. The maximum GST credit you can claim is $6,334, which is one-eleventh of the depreciation cap, adjusted for business use.
Example:
If your business use is 50% and you purchase a car for $70,000, the GST claimable would be $3,167 (50% of $6,334).
GST Credits on Your Business Vehicle Purchase
If your business is registered for Goods & Services Tax (GST), you may be entitled to claim a GST Credit on the purchase of your business vehicle. Because the car is considered a capital purchase (an asset to your business), you can claim back the GST portion of the purchase cost. However, there are a few important considerations to be aware of.
Claiming GST Credits
If the vehicle is used 100% for business purposes, you can claim the full GST amount on your purchase invoice. If the vehicle is only partially used for business, you can still claim GST credits, but the amount must be adjusted to reflect the business-use percentage.
Example:
If you buy a vehicle for $33,000 (including $3,000 GST) and use it 70% for business, you can claim 70% of the GST, which is $2,100.
The Impact of Finance Options on GST Credits
The way you finance the purchase also impacts how much GST credit you can claim:
✅ Chattel Mortgage, Hire Purchase, or Outright Purchase
You can claim the full GST amount upfront for the business-use portion of the vehicle.
This applies as long as you are registered for GST and the vehicle is used to generate business income.
✅ Finance Lease
With a finance lease, the lender retains ownership of the vehicle, and you lease it back.
In this case, you can only claim GST on each lease payment, not on the total purchase price.
This spreads out the GST claims over the life of the lease rather than upfront.
Example:
If you purchase a $40,000 vehicle under a chattel mortgage and use it 80% for business, you can claim 80% of the $4,000 GST, which is $3,200.If you lease the same vehicle, you only claim the GST portion from each monthly payment, not the whole $4,000 upfront.
Thinking of Buying a Vehicle for Your Business?
If you are looking at buying a vehicle for your business, please contact HelloLedger and we'll help you navigate the rules as they create both opportunities and traps for small businesses, if you don't fully work through how these might apply to your business.
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