Purchasing a vehicle: business or personal?

When purchasing a new vehicle, we often get asked by clients whether they should buy it under their business or personal name for the purpose of getting the biggest tax deductions.

There are several factors that we need to take into consideration in order to answer this question including whether the vehicle will be for business or private use and the tax exemptions you may qualify for.

Differences in calculations for vehicles owned by the company or personally

Personal use

If the vehicle is purchased under a personal name, the tax deductions for your expenses can be calculated using the logbook method or the cents per kilometre method.

Logbook method

Under the logbook method, you will need to take note of the business-use percentage of the vehicle’s expenses.

To use this method, you will need odometer readings and a logbook for a minimum of a continuous 12 weeks as evidence when you claim your deduction.

You must have written evidence and receipts of all vehicle expenses when using this method.

Cents per kilometre method

Using the cents per kilometre method, the rate is 72 cents per kilometre travelled for business purposes as of 1 July 2020. This rate changes from time to time so be sure to check the ATO’s website for the most recent rate.

This claim is capped at 5,000 business kilometres per vehicle. If your vehicle is jointly owned and used for separate income-earning activities, you may claim a maximum of 5,000 kilometres each.

You may be required to provide written evidence of how you recorded your kilometres travelled for business purposes, such as by providing diary records of trips made for these purposes.

Business use

If the vehicle is purchased under your business name, you will be able to claim all the expenses of using the vehicle including fuel, depreciation and interest. However, fringe benefits tax (FBT) must be taken into account.

Fringe benefits occur when a company-owned car is used by staff for private purposes such as driving home from work or running personal errands. The company must bear these costs.

There are exemptions to the FBT depending on the type of vehicle you own, so it is important to determine the best one for the requirements of your business activities.

An example of these exemptions is if a staff member uses a taxi, panel van, ute or other commercial vehicle for personal use that is limited to:

Travel between home and work;
Incidental travel in the course of travelling for work purposes; and
Short, infrequent and irregular travel unrelated to work.

Employers are not required to keep records of these instances, however you must be able to prove that the vehicle meets the eligibility criteria by making sure that the employee only uses the vehicle for the purposes mentioned above.

This can be done by regularly checking the odometer readings against the expected distance travelled by the employee for personal use. You could also keep a logbook as written evidence.

Considerations

Factors for you to consider when purchasing your vehicle include:

Fringe benefits tax (FBT)

If a vehicle owned under a company name is used significantly for personal use, you will need to bear a higher FBT.

Luxury car tax (LCT)

A luxury car tax is imposed when a car has a GST-inclusive value above the LCT threshold. The LCT threshold for 2020-21 is $77,565 for fuel-efficient cars and $68,740 for other vehicles, and the threshold for 2021-22 is $79,659 for fuel-efficient cars and $69,152 for other vehicles.
The LCT is imposed at a rate of 33% on the amount above the luxury car threshold and is usually paid by businesses or individuals that sell or import luxury cars.

GST credits

If you use your vehicle to provide ride-sourcing services, you may be eligible to claim GST credits for your vehicle’s expenses such as fuel, tolls, parking fees, insurance and depreciation.

GST credits are claimed when you lodge your BAS. You will need to apportion the expenses used for business purposes as well as the GST on those expenses. You can only make a claim on the business portion of your expenses.

If you have claimed a GST credit on an expense, you can only claim a tax deduction on the expense minus the GST in your income tax return.

Company vs individual tax rate

Depending on the stage of your business and the amount of deductible expenses you have put through the company, your income tax rate may end up being higher than your company tax rate.

If this is the case, you can identify expenses that are deductible under your personal name and out of the company, such as your car, and move it to a novated lease.

A novated lease is a car lease that your company pays for using your pre-tax salary. This will allow you to reduce your income tax through salary sacrificing.

Temporary full expensing

Businesses with an aggregated turnover of less than $5 billion are immediately able to deduct the business portion of the cost of eligible new depreciating assets, such as vehicles.

Current tax incentives may allow businesses that are unable to meet the $5 billion turnover test to be eligible for temporary full expensing if:
- their total ordinary income and statutory income is less than $5 billion for the FY20 income year (if the year ends on or before 6 October 2020); and
- their total cost of certain depreciating assets held and first used or installed ready for use in FY17, FY18, and FY20 exceeds $100 million.

To be eligible for temporary full expensing, the eligible new depreciating assets must be:
- new or secondhand (if your aggregated turnover is below $50 million);
- first held; and
- first used or installed ready for use for a taxable purpose between 6 October 2020 and 30 June 2022.

Not sure about your options?

Aero Group specialises in accounting, tax and business services. We understand the challenges that businesses have when handling taxes and the importance of making sure your costs are as low as they can be.

To help you achieve your business and personal goals, we have a dedicated team of experts ready to guide you through your tax journey.

If you need any help with your business’ tax planning, please do not hesitate to contact us on our website.