Current as of 18 November 2015
We get asked this question a lot, and depending on your situation the tax savings or benefits will differ between businesses. Here are a number of important issues you need to consider before buying a car (comparison between a sole trader individual and a company):
1. In what name should I buy the car in? 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 two common methods to claim the income tax deduction are the ‘logbook method’ or ‘cent per kilometre’ method.
The logbook method can produce a better tax outcome but it will require you to maintain a 12-week continuous logbook (you have to 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 5,000kms using a set rate depending on the engine capacity of the car. Unless you are GST registered you would not be able to claim the GST on the purchase of, and running costs of the car.
If the car is purchased by the company, 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 borne by the company 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). If you use your car predominantly for business purposes, you will gain a better tax result by applying the ‘operating cost’ method (the FBT will be calculated similar to the logbook method described above), but you must have a valid logbook for a 12-week continuous period. 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 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?
GST credits can only be claimed by the GST registered entity. 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 will also need to factor in the GST payable on the market value of the car. 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 will have to 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 is more than 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, there is no great tax or GST benefit in buying a car over the luxury car limit.
In addition to this, 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 car is owned by the company, FBT will be calculated on the car cost and not on 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, despite the fact that 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.
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