We are often asked the question by business clients who are purchasing a vehicle, “Should I buy it in the business name or in my personal name?”
There is no standard answer. It depends on 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 owned in personal names, the only two options are a log book percentage applied to the actual expenses or cents per kilometre. If going with the latter, the deduction available is 66c per kilometre travelled for business purposes. This is capped at 5,000kms so a maximum deduction of $3,300 per annum.
When owned by a Company (or Trust), then all costs are deductible but a contribution is required to be made to cover private usage in order to avoid fringe benefits tax. So, what is effectively deductible is the costs paid less this contribution for private usage.
Unless a log book has been prepared (and the log book requirements are strict and onerous) then the deemed private usage will be an amount equal to 20% of the cost price of the car (and it stays at this rate for 4 – 5 years).
The costs to be claimed are depreciation and all operating costs (fuel, repairs, registration, insurance etc).
Depreciation is a percentage of the cost price of the car but capped at a cost price of $57,581.
The deemed private portion is based on 20% of the full cost and is not capped at $57,581. So, for expensive cars 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.
So, 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 Tax Office allows depreciation for a car to be claimed based on an eight year useful life either at 12.5% of the cost price each year or 18.75% of the reducing balance.
But, in reality, a car loses most value in the first 12 months and the Tax Office accepts that a car generally loses 35% of its value in this period.
So here are some planning tips to consider.
If you acquire a car in the company name initially and then look to transfer the car to private ownership after 12 months at the then market value, then the company will effectively pick up a deduction equal to the loss in value, which will normally be around 35%.
Or, lease the car in the company name for one year with a 65% residual and personally pay out the residual to purchase back the car in personal names.
These strategies may not always produce the best result but are always worth considering.
Contact your AHBA advisor if you want us to run some calculations for you.