Unlocking the potential for tax deductions on business vehicle expenses is a key strategy for small business owners in Australia seeking to optimise their financial position.
While purchasing a car for business purposes is a popular approach to minimising tax liabilities, it’s not that simple. There are common misunderstandings about how much you can actually write off.
Given the dynamic nature of regulations set by the Australian Taxation Office (ATO), consulting with your small business accountant remains crucial to staying informed and ensuring compliance with the latest rules.
In this post, we simplify the process, providing essential insights for small business owners on how to claim tax benefits associated with their business car purchases.
Key Considerations Before Buying a Car for Business Purposes
Before you buy a car for business, remember these two important rules:
- Purchasing an expensive luxury car well above the luxury car tax rate threshold is usually not a wise financial decision.
- When buying a car for business purposes, make sure it has a high percentage of business use compared to personal use. This helps avoid unintended consequences like Fringe Benefits Tax (FBT) or higher income taxes.
Keep in mind that there are exceptions, so it’s advisable to discuss your specific situation with your accountant.
Is there GST on business car purchase?
Generally, businesses are allowed to claim GST on the purchase price of a vehicle. All you need is a valid tax invoice to substantiate this expense. There are some important things to note though:
- Your business must be registered for GST (Goods and Services Tax) and have a current ABN (Australian Business Number)
- If the motor vehicle or car is partly used in the business, you are generally only entitled to claim a partial GST amount based on your business use percentage.
- Purchasing a car more than the luxury car tax threshold means that the amount exceeding the limit is generally not claimable for GST on the purchase price.
There are certain exceptions to this luxury car tax rule. You may be able to claim the full amount of GST included in the total price of the car even if it is more than the luxury car tax limit.
The car must be used in carrying on a business and must meet one (1) additional condition such as being classified as trading stock or being a commercial vehicle not designed for the principal purpose of carrying passengers.
There are several other additional conditions you should check with your accountant first, but these are the most common ones applicable to most small businesses.
Types of motor vehicle deductions
According to the ATO, small business owners can claim tax deductions for motor vehicles used in your business. The following is a general list of the deductions you can claim as business-related motor vehicle expenses:
- Petrol, fuel, and oil
- vehicle registration
- repairs and servicing costs
- motor vehicle insurance cover premiums
- interest on a motor vehicle finance loan/lease
- lease payments
- depreciation (decline in value)
How can I claim the tax deductions for my car?
Your business structure is important as it determines how you can claim tax deductions for buying a car.
Sole traders and Partnerships
If you operate your small business as a sole trader or partnership, the method to use depends on the ATO’s definition of type of vehicle.
Cars are defined as motor vehicles that carry a load less than one (1) tonne and fewer than nine (9) passengers. For cars, you must use: the cents per kilometre or logbook method.
Other vehicles which include motorcycles, utility trucks or panel vans, must use the actual costs method. This method allows you to claim the actual costs of expenses you incurred based on receipts.
If you use the logbook or actual costs method for your car, you can only claim the business-use portion of your car expenses. Also, you can only claim depreciation or decline-in-value for the business-use percentage (%) of the car up to the luxury car tax threshold. You may be eligible as a small business to claim depreciation under the temporary full expensing rules, but we recommend you seek the advice from a small business accountant to better understand these complex tax rules.
Companies or trusts
If you operate as a company or trust, you must use the actual costs method for car deductions, regardless of the type of motor vehicle. You can’t use the logbook or cents per kilometre methods.
How Fringe Benefits Tax (FBT) applies to cars
FBT is an additional tax the company will have to pay when business owners, employees, or associates use company cars for personal use. It is separate from income tax or GST.
Business owners must consider whether the car is owned in the name of the company or an individual associate or employee of the company. It seems like a small difference but has important tax implications.
You can always claim tax deductions for motor vehicle expenses if they are business related. However, the complex tax issue of FBT comes about when business owners, employees, or associates use company cars for personal use.
You should speak with a registered tax agent to understand the processes and procedures you should put in place to avoid situations that give rise to FBT, where possible.
How do I claim depreciation on my company car?
When you buy a vehicle, each year you can claim a certain amount of depreciation (or decline in value) expense. This depreciation expense represents the annual general wear and tear on the vehicle over its useful life.
The ATO has some rules to assist small businesses with the process of claiming tax deductions for cars. You should discuss with a registered tax agent the ATO latest rules that apply to small business owners instant asset write-offs or temporary full expensing for motor vehicle depreciation deductions as they change almost every year. It is important to apply the correct rule to get the best tax outcome.
Ready to consult with tax agents at Blackwattle Tax on business car purchases?
Navigating the rules for claiming tax deductions on your company car can be confusing. While the ATO provides guides on their website, it’s wise to have a chat with a Registered Tax Agent and a small business accountant to better understand your options.
For personalised advice about purchasing a car for your business, book a FREE 30-minute consultation today with our tax agents at Blackwattle Tax.
Our seasoned Chartered Accountants are ready to support your business, with a proven track record across diverse industries. We’re here to help you achieve better financial and tax outcomes.
Want to stay informed and empowered in your financial decisions? Sign up for our monthly newsletter.
Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.
