It is a common misconception that cars should be acquired by a business entity. Instead consideration should be given to the reasons for purchasing the vehicle, the likely level of business use and the various tax consequences of holding a car though a business structure such as a company or trust.
These consequences are particularly important where the car you purchase is more than the luxury car depreciation limit ($57,581 for the 2018-19 tax year) due to the issues outlined below.
Where the cost of a car exceeds the luxury car limit the depreciation claimed as a tax deduction is capped at the luxury car limit multiplied by the applicable depreciation rate, irrespective of the actual cost of the car.
Goods and Services Tax (GST)
The credit that a business can claim for GST on the purchase of a car is also capped by the luxury car limit however, when a business sells the car it is required to remit GST on the full sale price.
For example if a business is entitled to claim GST on the purchase of a $400,000 car, its claim is limited to $5,235 (1/11th of $57,581 luxury car limit). However if it then sells that car for $280,000 it needs to remit GST of $25,455 (1/11 of $280,000)
Fringe benefits tax (FBT)
While an individual’s deduction for car expenses is limited to the business use percentage or a cents per kilometre claim, a company or trust is generally able to claim 100% of its annual running costs, depreciation and interest. However, FBT consequences must also be taken into account which may outweigh the benefit of the tax deduction.
FBT is payable based on the “grossed-up taxable value of benefits” which reflects the gross salary employees would have to earn at the highest marginal tax rate to buy the benefit after paying tax.
FBT for cars can be calculated using either the ‘Statutory formula method’ which is currently 20% of the cost of the car; or the ‘operating cost method cost’ method which requires a log book to be kept for a 12 week period to determine the actual private use of the car.
Example: an Aston Martin owned by a company costing $400,000 does not have a log book completed. Under the statutory method the value of private use for FBT purposes is $80,000, with a grossed up taxable value of $166,560 which would result in an FBT liability of $78,283. In comparison, the company could only claim depreciation of $14,395 (57,581 x 25%) and say running and interest costs of $30,000, totalling $44,395. Based on a company tax rate of 27.5%, the benefit of the tax deduction is only $12,209.
While the above example may demonstrate an extreme position and the list of issues considered above is not intended to be exhaustive, they highlight that the most appropriate entity to purchase a car depends on each individual’s circumstances and that you should discuss your circumstances with your accountant.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.