Buying a ‘new’ car is exciting but if you are also using that same car in your business your decision needs to also consider the 'numbers', not purely be based on impulse. So what do you need to think about to make sure your car purchase is right for you and your business’ bottom line?
Work out the primary use of the vehicle
All vehicles are a major outlay so it is important to ensure you pick the right type of vehicle to suit your particular business needs. For example, choose a small compact car if you need a car for short trips to carry documents or visit clients. Choose a ute or van if you are a tradesperson or need to transport a lot of equipment or bulky tools. Also consider whether the vehicle will be used for driving in the city, on the highway or even off road as you may require a vehicle with 4WD capabilities.
If you plan to use the car solely for work purposes, then it makes sense for the business to buy it. However, if you think it will be used for more out-of-office activities – such as school runs or driving to the supermarket – then it may be easier to claim the car’s use as a personal.
New or used
This is a common question and the answer varies from person to person but here are some things to help guide your decision.
Buying a new vehicle means you are looking at a higher purchase price as well as higher insurance premiums but this comes with better reliability, the latest safety features and attractive new car warranty periods, some up to as much as ten years or based on distance travelled. You will also get a bigger tax deduction and will may have a higher residual when the time comes to replace the vehicle down the track (by also keeping it well maintained). But the moment you drive a new vehicle off of a dealer's lot, it immediately becomes worth much less than the price you paid for it.
Buying a used vehicle means you are looking at a lower initial cost and also cheaper insurance premiums, however with less knowledge on the condition of the vehicle as well as shorter warranties if buying from a dealers, and no warranty with a private purchase, if something goes wrong, you may find yourself purchasing a replacement vehicle earlier than you want to. You are also likely to get a lower residual value when this vehicle is due to be replaced.
How long you expect to keep your vehicle is an important factor to consider when choosing between a new or used vehicle, as if you expect to keep it long-term then it makes sense to buy a vehicle with high residual value and at the top of its lifespan. But if you only use the vehicle occasionally, then a used car that won’t have much wear and tear would be the better choice.
Make sure you read all the fine print with all vehicle purchases and when considering any warranties based on time frame or distance travelled, how your expected vehicle of the use compares, particularly if you expect to be racking up the kilometres.
Buy it outright or finance
If you’re a good saver, you might have the cash to pay for your new car outright. Paying cash means you won’t be paying any interest on the purchase so it should be easier on long-term cash flow.
However you need to consider if that is the best use of your business cash reserves - you may actually be better served keeping funds available for any working capital needs. It may also be the case that you don’t have access to all of the cash anyway, so financing may be a good option. There are a number of different types of vehicle finance available, each having different resulting in tax and ownership implications. There main finance options available include:
Hire Purchase: you pay to ‘hire’, or rent, the car over the lease with the option of buying it at the end. The lender is the legal owner of the car.
Chattel Mortgage (Goods Loan): you borrow money to buy the car from the lender. Under this option you are the legal owner of the vehicle but have a mortgage over the car.
Small Business Loan/Personal Loan: similar to a goods loan, you borrow money from your bank or lender. You are the legal owner of the vehicle and the loan may be secured against the vehicle or other assets or unsecured (but then subject to higher interest rates).
Lease operating or finance lease: the lender agrees to rent the vehicle to you for a set period for an agreed (generally monthly) amount. When the lease ends, you have the option to:
Pay the residual amount (the balloon) and buy the vehicle
Upgrade by taking out a new lease and starting again.
You can claim a tax deduction on the running costs of your vehicle depending on how much you use it for work using one of two ATO-approved methods; cents per kilometre or logbook.
For most businesses, the logbook method vehicle expenses will result in the biggest deduction. A logbook will need to be kept to record the details of your business trips and prove the business-related portion of expenses that can be claimed.
A logbook must be kept for a 12-week period and is valid for five years. The logbook must record the motor vehicle’s odometer readings at the start and end of the logbook period, for each trip as well, kilometres and the purpose of each trip.
If using the log-book method, a business owner can claim the business related portion of the following tax-deductible motor vehicle expenses:
fuel and oil
maintenance costs, such as routine servicing and repairs
insurance premiums - comprehensive insurance and green slip
membership fees, such as road-side assistance
interest on finance
Depreciation or simplified depreciation or instant asset write off or temporary full expensing
This is where things get complicated!!
Under the capital allowance rules, a vehicle is what is referred to as a depreciating asset, where the benefit it provides to your business over a number of years declines over its effective life. So the cost of each eligible capital asset is written off over a period of time based on how long that type of asset would normally be used to generate income, considering wear and tear from use and having to be replaced or scrapped at some time in the future once the asset is not able to be used for business purposes.
There have been a number of stimulus measures introduced by the Government to encourage businesses to undertake capital expenditure. These measures apply between 2 April 2019 and 30 June 2023, and instead of claiming a portion of the cost of an asset over a number of years, you could essentially claim the business portion of the full cost of an eligible capital asset in one year, the year you first hold and use the asset in your business.
Note that vehicles that are classified as a 'car' that are designed mainly to carry passengers ie carry a load less than one tonne and fewer than nine passengers, remain subject to the car depreciation cost limit which is $64,741 in 2022-23. So if the cost of your vehicle is over $64,741, the amount deductible is reduced to the business portion of the car depreciation cost limit.
General Depreciation Rules
The general depreciation rules set the amounts (capital allowances) that can be claimed, based on the asset's effective life.If you choose to use the depreciation rates set by the ATO Commissioner. For motor vehicles that rate is 25% which means the cost of the vehicle is claimed roughly over 5 years).
Simplified Depreciation Rules
For your income years ending before 6 October 2020, the simplified depreciation rules would require you to:
pool the business portion of most higher cost assets (those with a cost equal to or more than the relevant instant asset write-off threshold) and claim
a 15% deduction in the year you start to use them or have them installed ready for use
a 30% deduction each year after the first year
deduct the balance of the small business pool at the end of the income year if the balance at that time (before applying the depreciation deductions) is less than the instant asset write-off threshold.
However with the changes announced by the government announcing a suite of measures to stimulate investment due to Covid19, this method has changed to instant asset write-off approach.
Instant Asset Write Off/Temporary Full Expensing Rules
Businesses with an aggregated turnover of under $5 billion can immediately deduct the business portion of the cost of eligible new assets purchased and installed for use between 7.30pm 6 October 2020 and 30 June 2023.
For businesses withan aggregated turnover of less than $50 million, temporary full expensing also applies to second hand assets.
The immediate deduction is claimed in the year the asset is first used or installed ready for use for a taxable purpose. Note that the depreciation cost limit must be considered still for any asset being claimed under TFE because passenger vehicles are still subject to the annual car limit ($64,741 in 2022-23).
Goods & Services Tax
If you’re registered for Goods & Services Tax (GST), then you may be entitled to a GST Credit on the purchase of your vehicle. Because the car is considered a “capital purchase” (that’s an asset to your business), the entire GST amount on your tax invoice could be claimable, but there are a few things to consider.
If you don’t use the car completely for business use, that’s okay. You can still get GST credits, but it will be adjusted accordingly, based on how much you use the car for business versus personal use.
Also the type of finance option used does impact on how much GST credit can be claimed eg if purchased under a lease, you generally can only claim the GST applicable to each lease payment, whereas if you purchase outright or finance through a chattel mortgage, hire purchase or small business loan/personal loan, you can claim the full GST amount (business portion).
Note where the vehicle is a passenger vehicle it will be subject to the car depreciation cost limit which also puts a limit on the maximum GST credit claimable to $5,885, 1/11th of $64,741 in 2022-23 (and the business portion of this amount).
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.