We are often asked this question many times by business clients who are purchasing a new motor vehicle.
Unfortunately, there is no standard answer. It depends on many factors such as the cost of the car, its operating costs and its usage.
Here are a few points to bear in mind when working out what will give you the biggest tax deductions when buying a motor vehicle:
Motor Vehicle Purchased in a Personal Name
When owned in personal names, the only two methods are:
- Logbook method
- Cents per kilometre method
If going with the latter, the deduction available is 68c per kilometre travelled for business purposes. This is capped at 5,000kms so a maximum deduction of $3,400 per annum.
Motor Vehicle Purchased by a Company or Trust
When owned by a Company (or Trust), all costs are deductible by the Company (or Trust).
However, if the vehicle is used for private purposes, a contribution is required to be made to cover private usage in order to avoid fringe benefits tax.
Fringe benefits tax can also be avoided if purchasing vehicles that are exempt vehicles. So, what is effectively deductible is the costs paid less this contribution for private usage.
Unless a log book has been prepared, the deemed private usage will be an amount equal to 20% of the cost price of the car (the cost price of the car is reduced by 1/3 after owning it for 4 years).
The company will be able to deduct costs such as depreciation, all operating costs (fuel, repairs, registration, insurances etc), interest if buying the vehicle on HP or on a lease and in addition to that, if registered for GST, claim the GST input tax credit on the vehicle cost and some of the ongoing operating costs.
Depreciation
Depreciation is a percentage of the cost price of the motor vehicle but capped at a cost price of $57,581. The maximum GST input tax credit that can be claimed is one-eleventh of the capped cost price.
The deemed private portion is based on 20% of the full cost and is not capped at $57,581. So, for expensive motor vehicles you can actually have a deemed private portion that is greater than the total deductible costs and that is why it is usually not effective to have expensive cars owned by your company.
The base equation to determine if owning the car in your company name will give you better tax deductions than owning it personally is if:
We can run models to determine this for you.
The ATO allows depreciation for a motor vehicle to be claimed based on an eight year useful life either at 12.5% of the cost price each year or 25% using the diminishing value method.
But, in reality, a motor vehicle loses most value in the first 12 months and there are strategies that could be implemented to produce the best results.
Contact your Allan Hall advisor if you would like to run some calculations for you or if you have any further questions regarding this topic.