Many business owners know that buying a motor vehicle can result in a tax deduction but aren’t aware that the process isn’t so straightforward.
Before buying a business vehicle, you should consider whether you’ll be primarily using the car for business or if you’ll be using it more for personal use. If you previously successfully bought a ute and claimed for the business, it doesn’t automatically mean you’ll have a similar experience with buying a luxury motor vehicle.
Before you take out the car loan and sign on the dotted line, here’s everything you need to consider before buying a vehicle for your small business.
Do You Really Need a Business Vehicle for Business Purposes?
If you require a motor vehicle to perform your essential business services, such as transporting tools and equipment or delivering goods, you may indeed require a work vehicle.
If you work from home and only attend client meetings occasionally, or go to the post office for business purposes a few times a week, buying a car for business use is probably not the most financially savvy decision.
If you or any of your employees use the business motor vehicle for personal use, you’ll have to pay fringe benefits tax (FBT) to the Australian Taxation Office (ATO). The FBT is worked out according to the use of the business vehicle for private purposes. Therefore, FBT is an additional tax expense borne by the employer.
How Is FBT Calculated?
FBT can be calculated using the statutory formula or by the operating cost method.
Statutory Formula FBT Method
This method is based on the vehicle’s costs rather than its use for private purposes. Many businesses choose this option because it is straightforward and doesn’t require the drivers to maintain a detailed logbook.
The taxable value using this method relies on the following factors for the calculation:
Taxable value = ((A × B × C) ÷ D) – E
- A: base value of the car
- B: percentage of applicable statutory
- C: number of days in the FBT year when the car was available for private use by employees
- D: number of days in the FBT year
- E: employee contribution.
The statutory FBT method uses a flat rate of 20% of the car’s base value, including how many days per year the vehicle is used privately. This means all times when the vehicle is with an employee and not at the workplace.
Even if a car isn’t being used for private purposes, if it’s in a position where it can be used for personal use, FBT is charged. This means, if the vehicle is parked in an employee’s garage every night, those hours will be taxed because the employee could use the car after work hours.
Operating Costs FBT Method
This method is also known as the logbook method because drivers must use logbooks to keep track of their work use and private use of the vehicle.
A benefit of the operating cost method is that there are fewer fleet FBT fees if the car is used for work more than used privately.
A driver must keep a logbook for 12 consecutive weeks and record:
- each trip’s purpose,
- the number of kilometres travelled in each trip, and
- if it was a work-related or private trip.
Each vehicle’s logbook is valid for the next five years so long as there aren’t any changes during that time of the business-use pattern.
The vehicle’s private use percentage (the number of kilometres travelled for private use divided by the total kilometres recorded) is multiplied by the vehicle’s yearly running costs (fuel, insurance, maintenance), depreciation and interest to work out the tax payable.
Take note that travel to and from work generally isn’t considered business use and must be recorded as private use.
Each vehicle’s logbook is valid for the next five years so long as there aren’t any changes during that time of the business-use pattern.
The vehicle’s private use percentage (the number of kilometres travelled for private use divided by the total kilometres recorded) is multiplied by the vehicle’s yearly running costs (fuel, insurance, maintenance), depreciation and interest to work out the tax payable.
Take note that travel to and from work generally isn’t considered business use and must be recorded as private use.
EXAMPLE: Tim purchased a car for his business in January 2006. His son, Jeremy, who works for him used the car privately during the FBT year from 1 April 2006 to 31 March 2007.
- Operating costs for that period which include GST, fuel, insurance, registration, repairs etc total $5,000.
- The depreciated value on 1 April 2006 is $20,000. Depreciation of 25% until 31 March 2007 would therefore be $5,000.
- The statutory interest rate is 9.00%. The interest component until 31 March 2007 will be $1,800.
- The percentage of private use established under the procedures outlined above is 25%.
- Jeremy spent $1,000 on fuel and gave the declaration to his dad (the employer).
So, the taxable value of the car fringe benefit for the 2006-07 FBT year is:
A × B – C
- A is $11,800 (total operating costs), so $5,000 actual costs + $5,000 deemed depreciation + $1,800 deemed interest
- B is 25% (percentage of private useage)
- C is $1,000 (employee contribution amount)
($11,800 × 25%) – $1,000 = $1,950
Should You Buy the Vehicle Personally and Claim Tax Deduction?
If you choose to buy a vehicle in your personal capacity, a tax deduction can still be claimed for car expenses when the car is being used for business purposes. However, note that such a deduction would need to be filed and taxed from a personal income accounting standpoint.
You can claim your expenses using the logbook method or the cent per km method. A better tax outcome can generally be expected using the logbook method, and it’s not as time-consuming and tedious as before, thanks to specifically designed apps recognised by the ATO.
Once you’ve calculated the percentage of time or kilometres spent on business purposes for the year, it is applied to the vehicle’s running costs and expenses, including maintenance, petrol, insurance, depreciation. If you use the car for business 80% of the time, 80% of the vehicle-related costs will be used as a tax deduction.
Why Small Business Owners Can Benefit From the New Instant Asset Write-Off Laws
The Australian Government increased the instant asset write-off scheme in 2020 in response to the global COVID-19 pandemic and eradicated the limit of $150,000 per asset.
The scheme has been extended until mid-2023, providing relief to individuals and small business owners suffering from delivery delays due to stock shortages.
An instant asset write-off is for businesses turning over less than $5 billion. It shortens the timeline of depreciation, meaning tax benefits are realised faster as you don’t have to wait until the end of the financial year before you can claim your car tax deduction.
Why It’s Important To Have an Accountant
A business owner shouldn’t only start thinking about tax deductions at the end of the financial year – by then, it can often be too late or a massive headache to consolidate.
An accountant can determine potential deductions during the entire year and help you develop a strategy on how to maximise your savings.
As a business owner, you should make your sole focus on running your business. An accountant’s profession is to manage your taxes, so don’t spend your time and energy trying to do so single-handedly.
Key Takeaways
Before buying a car for business purposes, consider how much it will be used for personal and business use.
Fringe benefits tax must account for any time the car isn’t under business use – this includes driving to and from work and even remaining in a personal garage overnight. FBT can either be calculated via the statutory formula or by the operating cost method.
If you are going to be using the car largely for personal use instead of business, it may be better to buy a vehicle in your personal capacity. You are able to claim a tax deduction for car expenses when the car is being used for business purposes.
If your small business turning over less than $5 billion needs a work vehicle, you can receive an instant asset write-off if you buy a car before June 2023.
Taking out a car loan and buying a car isn’t a small feat, so it’s worth employing the help of an accountant to assist you with managing your taxes and tax deductions.
Contact us today for help with all small or large business-related purchases, and our accountants can help you optimise your tax savings.
Disclaimer:
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.