Current as of 29 April 2021
We are often asked about the best way to structure the purchase of a motor vehicle. The answer will be different for each individual or business, but the issues to be considered when making this decision is the same. To put you in the position to decide on the motor vehicle purchase, below we have listed the important issues you need to consider before buying a car, including the comparison between buying in your own name versus a company name.
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 through using the ‘logbook method’ or ‘Cent Per klm’ 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 Klm method allows you to claim a maximum of 5,000 klm 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 allows the employer to calculate FBT using the statutory formula method which works out the cost of the private use of car as 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 could 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 other available FBT method – the ‘Operating Cost’ method (like the logbook method described above). Again, 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, finance interest, depreciation 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 2022, businesses can access the very generous Instant Asset Write Off (IAWO) provisions which allow you to write off either the whole cost (for new assets for turnover < $5 billion), or up to $150,000 (for new or second hand assets for turnover < $500 million) depending on what the business’s turnover is. This concession is only available to businesses, regardless of the type of structure. If you are not in business in your own name, the IAWO concession would not be available to you2.
2. Do you want to claim the GST on the purchase and running costs of the car?
GST credits can only be claimed by a 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 Klm method generally produces a less GST credit claim due to the maximum claim of only 5,000 klm. This limitation does not apply to cars owned by the company as the FBT rate 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 $5,000 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 motor vehicle cost limit affect my tax and GST credit claims?
If the car you purchased is more than the current motor vehicle cost limit of $59,136 (for the 2020-2021 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 $59,136 and the maximum GST credit allowed is $5,376. Therefore, you would have to take this into account if you are considering buying a car over this 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 cost limit. For example, if you bought a car for $80,000 your GST credit would have been capped at $5,376 and assuming you later sold it for $70,000 you will be up for $6,363,64 GST payment to the ATO (1/11th of the sale price) and not just the GST credit you claimed (i.e., $5,376). This can become quite an impost should you buy a high value car and sell it within a couple of years with the value still high.
If the car is owned by the company, FBT will be calculated on the car cost and not on the motor vehicle cost limit. Therefore, if you purchased a Porsche for $200,000, the FBT will be calculated on this value for both the Statutory Formula and Operating cost methods, even though you can only claim $59,136 in IAWO or depreciation on the car.
As an aside, there are certain commercial vehicles which are not subject to the cost limits mentioned above. If the vehicle satisfies the commercial vehicle rules (like certain utes and vans) then the limits for IAWO concessions on the cost do not apply. You will be able to
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 $59,136. With the IAWO concessions available until 30 June 2022, the decision on what name to buy the motor vehicle may be different before then compared to after that date.
It really is an area you need to take advice on before committing to a purchase. Do not hesitate to contact your client manager to discuss.