As a small business owner in Australia, you always look for ways to streamline your operations, increase efficiency, save money, and grow your business.
One of the common hurdles you might face on this journey could be travelling for business meetings or delivering goods and services. But have you considered buying a car for business purposes?
Nowadays, buying a commercial vehicle for your business doesn’t have to break the bank, thanks to the generous instant asset write-off laws. Designed to provide immediate tax relief, it can give your small business the financial boost it needs.
However, understanding these laws and just how much you can save can often feel like a maze. So, let’s examine everything you need to know.
Do You Really Need a Business Vehicle for Business Purposes?
Whether you need to visit clients, meet suppliers, or run errands for your business, a dedicated vehicle could be a sound investment.
Remember, the instant asset write-off incentive allows small business owners to deduct the business portion of the vehicle’s cost in the same income year the asset is first used or installed ready for use. This could significantly affect your annual tax bill, and potentially offset some of the initial outlay of purchasing a new car for your business operations.
The instant asset write-off can be applied whether you decide to lease or buy. However, remember that the vehicle’s use will be assessed for verification of business purposes. From visiting clients to picking up office supplies, the need for the vehicle must directly relate to running your business.
How Is FBT Calculated under the Instant Asset Write-Off?
FBT can be calculated using the statutory formula or the operating cost method.
Statutory Formula FBT Method
This method is based on the cost of the commercial vehicle 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 the number of days per year the vehicle is used privately. This means all times the vehicle is with an employee and not at the workplace.
Even if a car isn’t being used for private purposes, FBT is charged if it’s in a position where it can be used for personal use. 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 as long as the existing business-use pattern does not change during that time.
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.
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 as long as the business-use pattern does not change during that time.
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.
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 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, you can still claim an instant asset write-off for car expenses when the car is being used for business purposes. However, note that such a deduction must be filed and taxed from a personal income accounting standpoint.
You can claim your expenses using the logbook or the cent per km method. The logbook method generally produces a better tax outcome, 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, and depreciation. If you use the car for business 80% of the time, 80% of the vehicle-related costs will be eligible for instant asset write-off.
Why Small Business Owners Can Benefit From the New Instant Asset Write-Off Laws
Introduced by the Australian Government in 2015, the $20,000 instant asset write-off has been a boom for countless businesses, aiding them in increasing investment and economic growth.
However, with time, this policy took several turns and extensions.
Jump to recent times, and we had the temporary full expensing rules in place. These dictated an immediate write-off for the complete cost of acquired assets from 6 October 2020. But the curtain fell on these rules on 30 June 2023.
The situation was set to become challenging as the instant asset write-off threshold was to recede to a meagre $1000 from 1st July 2023. In time, the government has tabled a bill in parliament proposing amendments that would maintain the threshold at a substantial $20,000 for small businesses for the 2024 income year.
Conditions to Qualify for The $20k Instant Asset Write-Off
- The business should be operational per standard principles in the income year 2024.
- The business should have an annual turnover under $10m, calculated from the current or previous year’s figures.
- The business needs to apply simplified depreciation rules for the income year 2024.
- The cost of the claimed asset should be below $20,000.
- The asset should see its first use or be installed for use between 1st July 2023 and 30th June 2024.
Important Notes:
- Note that if your enterprise doesn’t choose to apply the simplified depreciation rules for the 2024 income year, it will be ineligible for the instant asset write-off rules, regardless of other conditions.
- What’s more, this $20,000 threshold applies per asset. So, your business could potentially enjoy a full-cost deduction of multiple assets in the 2024 year, as long as each asset’s cost is under the specified threshold. The elevated threshold also affects whether a full pool balance gets written off in the income year of 2024.
- However, bear in mind that the calculations don’t consider the closing pool balance. Instead, you’re looking at the pool balance if you discarded the current year depreciation deductions for the pool for the 2024 year.
- If you choose to exit the simplified depreciation regime, the five-year lock-out rules will continue to be suspended till 30th June 2024. But remember, the instant asset write-off rules only apply to assets covered under depreciation provisions. Any spending on capital improvements to buildings governed by capital work rules does not qualify.
- Assets bearing a price tag of $20,000 or more, which can’t be instantly written off, retain their space in the small business general pool. They continue to depreciate at 15% in the first income year and 30% in the subsequent income years.
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 – this leaves it too late and the whole thing becomes 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 focus solely 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 the purchase price and how much it will be used for personal and business use.
- Fringe benefits tax must account for any time the car isn’t used for business—this includes driving to and from work and even remaining in a personal garage overnight. FBT can either be calculated using the statutory formula or the operating cost method.
- If you will be using the car largely for personal use instead of business, it may be better to buy a vehicle in your personal capacity. You can claim a tax deduction for car expenses when the car is being used for business purposes.
- If your small business, with a turnover of 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 an accountant to help you manage your taxes and tax deductions.
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.
