Some people buy a business vehicle to receive a business tax write-off, but the process isn’t necessarily straightforward.
When a business owner buys a vehicle, they need to consider various things before committing, such as depreciation, whether they’ll use it for personal trips, and how often. It’s also crucial to note where the car will stay overnight during the week and weekends.
Answering these questions will help you determine whether you will be able to claim deductions for the vehicle or not. To support you in this process, we’ve compiled this guide on everything you need to know before committing to buying a car for your small business.
Eligibility and Qualification
What is a Business Car Tax Write-Off?
A business car tax write-off is a valuable tax deduction that allows businesses to claim a portion of the expenses related to a motor vehicle used for business purposes. The Australian Taxation Office (ATO) permits businesses to claim deductions for various costs associated with the vehicle, including depreciation, fuel, maintenance, and other operational expenses. This means that if you use a car for business activities, you can reduce your taxable income by the amount spent on these car expenses, thereby lowering your overall tax liability.
Must Primarily Be Used For Business Purposes
To qualify for a business car tax write-off, the motor vehicle must be primarily used for business purposes. This means the car should be used for business activities more than 50% of the time.
Maintaining accurate records of the vehicle’s usage is essential to substantiate the claim. For instance, if you use the car to visit clients, deliver goods, or attend business meetings, these activities should constitute most of the vehicle’s use. Ensuring that the vehicle is predominantly used for business purposes is crucial for claiming its tax benefits.
Maintain Accurate Records
Maintaining accurate records is crucial to substantiate a business car tax write-off claim. The business must keep a detailed logbook that records the vehicle’s business use, including the trip’s date, time, and purpose.
The logbook must be kept for at least 12 continuous weeks and updated every five years or if the business use percentage varies by more than 10%. This meticulous record-keeping helps accurately calculate the business use percentage and ensures compliance with ATO requirements, making it easier to claim the appropriate tax deductions.
Is a Car Really Needed for Business Purposes?
In certain cases, a business car is essential for primary business services, such as delivering goods or transporting tools and equipment.
Your business structure can also influence the decision to buy a car for business purposes, as different structures have varying implications for tax deductions and vehicle expenses. If you work from home, or you only have to go to the post office sometimes, or attend client meetings here and there, buying a car to use for business purposes might be a challenging decision.
The logbook method is often used to track the business use of a vehicle, which can influence the decision to buy a car for business purposes.
Work vehicles used for personal purposes result in the business owner paying fringe benefits tax (FBT), which is paid to the Australian Taxation Office as an extra expense.
Calculating Business Use Percentage
Calculating the business use percentage is essential to determine the amount of tax deduction that can be claimed. The business use percentage is calculated by dividing the number of kilometres used for business by the total kilometres travelled during the logbook period. This percentage is then applied to the interest, annual depreciation, and running costs such as fuel, insurance, and maintenance to determine the amount of tax payable. For example, if your vehicle is used for business 70% of the time, you can claim 70% of the related expenses as a tax deduction.
This calculation ensures that only the business-related portion of the car expenses is deducted, aligning with ATO guidelines.
What Expenses Can I Claim for a Business Car?
Businesses can claim a range of expenses related to a motor vehicle used for business purposes, including:
- Depreciation: The decline in value of the vehicle over time.
- Fuel: The cost of fuel used for business purposes.
- Maintenance: The cost of repairs and maintenance, including servicing and replacement of parts.
- Insurance: The cost of insurance premiums for the vehicle.
- Registration: The cost of registering the vehicle.
- Interest: The interest paid on a car loan or lease.
- Lease payments: The payments made on a car lease.
Depending on the business’s circumstances, these expenses can be claimed using the logbook method or the cents per kilometre method. The logbook method often accurately reflects business use, while the cents per kilometre method offers a simpler, albeit less precise, alternative.
By understanding and accurately claiming these expenses, businesses can effectively manage their car expenses and maximise their tax deductions.
How Do You Calculate FBT?
You can calculate FBT using one of the following two methods, which take into account various car expenses:
The cents per kilometre method is another way to calculate car expenses for tax purposes, offering a simpler alternative to the logbook method.
Statutory Formula FBT Method
This method focuses on all vehicle costs. Business owners prefer this method because it’s straightforward, and drivers aren’t obligated to maintain a detailed logbook.
This is the method used to calculate the 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 the car may be used privately
- D: number of days in the FBT year
- E: employee contribution.
The time the car was used privately refers to the number of days the car was with an employee rather than at the workplace.
Something important to remember is that even if the car isn’t being used for private purposes if it’s in a position where it could be used for personal purposes, that period will incur FBT charges.
For example, if the vehicle is parked overnight in an employee’s garage, you will be taxed on the hours there because there’s no way to regulate whether the employee uses the car after work hours for personal purposes.
Operating Costs FBT Method
This method requires drivers to use logbooks to keep track of the differences between the private and business use portions.
This method can be beneficial, as fewer fleet FBT fees are incurred if you can prove that the car is used for personal purposes less than for business.
A logbook must be used for 12 weeks consecutively, recording the following:
- Each trip’s purpose,
- The number of kilometres travelled in each trip, and
- If it was a personal or work trip.
You can calculate the car’s business use percentage by dividing the number of kilometres used for business by the total kilometres recorded. This is then multiplied by the interest, annual depreciation, and running costs such as fuel, insurance, and maintenance to determine the amount of tax payable.
Travelling to work and home again isn’t typically considered business use, so it should be recorded in the logbook as private use.
Is It Better To Buy the Vehicle Personally and Claim Tax Deductions?
If you purchase a new vehicle in your capacity, you can claim tax deductions for expenses incurred under business use. Note that this deduction must be filed and taxed via personal income accounting. If you decide to take a car loan to finance the purchase, the interest on the loan can also be claimed as a tax deduction, provided the vehicle is used for business purposes.
You can claim expenses using the logbook or cent per-kilometer method. Most people find that the logbook method produces a better tax outcome and isn’t as time-consuming as before, thanks to apps available to help – like DriversNote.
If the motor vehicle is used for business 75% of the time, you can claim 75% of the vehicle’s running expenses and other costs as a tax deduction.
Instant Asset Write-Off Updates for 2024-25 Financial Year
The Australian Government has extended the $20,000 instant asset write-off scheme for another 12 months until 30 June 2025. This measure aims to support small businesses, allowing them to claim an immediate deduction for the purchase price of eligible assets.
To be eligible, businesses must have an aggregated turnover of less than $10 million. The $20,000 threshold applies per asset, so small businesses can instantly write off multiple assets.
The instant asset write-off can be used for new and second-hand assets as long as they are first used or installed and ready for use between 1 July 2024 and 30 June 2025.
Assets valued at over $20,000 that cannot be immediately deducted can be placed into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each year thereafter.
Eligible assets include vehicles (subject to load and passenger limits), machinery and equipment, computers, office furniture, tools, technology hardware, solar panels, kitchen equipment, agricultural machinery, and manufacturing equipment.
However, the scheme does not apply to capital improvements to buildings, intangible assets, or assets not used for taxable purposes.
Key Takeaways
If you’re thinking about buying a motor vehicle for business purposes, it’s crucial to consider how often you’ll be using it for personal purposes, including:
- Fringe benefits tax is charged for the duration of time the car isn’t under business use, and this includes staying in a home garage overnight and driving to and from the office.
- FBT is worked out using the statutory formula or operating cost method.
- If you realise that the business vehicle will be majority personal use, it’s worth considering just buying it in your capacity instead. This way, a tax deduction is claimable for motor vehicle expenses when used for business purposes.
- Here is the updated line for the 2024/25 financial year:
- Small businesses with an aggregated turnover of less than $10 million can receive an instant asset write-off if they purchase a business vehicle before 30 June 2025, subject to the car limit.
- Be aware of the car limit, which sets a maximum claimable amount for tax deductions on passenger vehicles. This limit can affect your eligibility for certain tax benefits.
- Applying for a loan to buy a car shouldn’t be taken lightly, so it’s important to seek professional advice from an accountant to help you manage your business and personal taxes and deductions.
Contact KNS Accountants today, and we’ll help you through the process and help you make the best financial decision to suit your situation and even save you money on penalties and fines.
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.
