How to Book a Company Car in Xero

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How to book a company car in Xero? Here is how you do it.

Book a company car in Xero

To book a company car in Xero is complex – there are a lot of moving parts. You have the split between principal and interest. Then depreciation or the instant asset write off. GST. The car limit. FBT. And last but not least a potential Div 7A issue. That is a lot. But let’s go through it step by step.

Acquisition

Let’s use an example. On 14 April 2020 you bought a car for $80,000 – a so-called ‘luxury car’ – and the dealer invoice says the following:

NetGSTGross
Vehicle Price69,698.476,969.84776,668.32
Transfer Fee34.00034.00
LCT (Luxury Car Tax)342.680342.68
Stamp Duty2,955.0002,955.00
73,030.156,969.8580,000.00
Less Deposit(2,000.00)
Less Finance Liability(78,000.00)
Due0.00

You book this purchase in Xero in 9 simple steps.

Step 1 – Raise a Bill 

You start with raising a bill if the car is financed. If you pay for the car, you have a choice – bill or money spent.

DR Fixed Asset 1GST on Expenses69,698.47
DR Fixed Asset 1GST Free Expenses34.00
DR Fixed Asset 1GST Free Expenses342.68
DR Fixed Asset 1GST Free Expenses2,955.00
DR GSTSystem generated6,969.85
CR Car Finance LiabilitySystem generated – BAS Excluded(80,000)

So the car shows up in your balance sheet with $73,030.15.

Step 2 – Reconcile Loan Repayments 

Every time there is a loan repayment, you need to split the payment between principal and interest as listed in the finance documents.

DR Car Finance LiabilityBAS Excluded1,000
DR Interest ExpenseBAS Excluded1,00
CR BankSystem Generated(1,100)

If you paid for the car outright, then you can skip this step. There is no liability to repay.

Step 3 – Determine Car Limit Excess

If the purchase price of your car is below the car limit in the year of purchase, you can skip this step. If it isn’t, you claimed too much GST in Step 1. So now you adjust this.

The car limits for 2019/20 and 2020/21 are as follows (for all cars, whether fuel efficient or not):

YearNetGSTGross
2019/2052,346.365,234.6457,581.00
2020/2153,760.005,376.0059,136.oo

This is the maximum GST and depreciation you can claim. No need to pro rata for having bought the car sometime during the year. 

Step 4 – Adjust GST

So now you adjust the GST to these amounts. Here is the booking.

DR Fixed Asset 1BAS Excluded19,087.32
CR Fixed Asset 1GST on Expenses(17,352.11)
CR GSTSystem generated(1,735.21)

The GST of $1,735.21 you no longer claim increases the cost of the car from $73,030.15 to $74,765.36.

Step 5 – Instant Asset Write Off 

Thanks to the instant asset write off ($150,000 threshold until 30 June 2021), you can claim the car in one go. But you only get a tax deduction up to the car limit.

DR Instant Asset Write Off ExpenseBAS Excluded52,346.36
DR Non Deductible ExpensesBAS Excluded22,419.00
CR Accumulated Depreciation Asset 1BAS Excluded(74,765.36)

You can book the GST adjustment through a manual journal – as done above – or through the depreciation worksheet in Xero.

Step 6 – Determine FBT Days

In the year of purchase (or sale) you don’t hold the car for the full 365 days. Open the ATO day calculator here and calculate the days from the date of purchase to 31 March. The FBT year goes from 1 April to 31 March.

In this example you bought the car on 14 April 2020. So you calculate the FBT days from 14 April 2020 to 31 March 2021, which are 352 days.

Step 7 – Calculate FBT

Any company car takes you into FBT territory. FBT stands for Fringe Benefit Tax.

Providing you or any employee with a car constitutes a car benefit covered by Division 2 FBT Assessment Act, giving rise to FBT. 

To work out your FBT position, you choose between the statutory formula method and the operating cost method. The later requires a log book.

Which one is better depends on how much you REALLY use the car for business. If less than 80%, use the statutory formula method which works like this (base value excludes registration or stamp duty):

Taxable Value = Base Value (cost + delivery + GST) x 20% x Available Days/365 – Employee Contribution

Not relevant in the year of purchase or the subsequent 3 years, but once you owned the car for at least 4 years on 1 April, you can reduce the base value by 1/3 (33.33%).

NetGSTGross
Vehicle Price69,698.476,969.84776,668.32
Transfer Fee34.00034.00
TOTAL Base Value69,732.476,969.8576,702.32
x 20%15,340.46
x 352/365 days14,792.81

So you take 20% of the base value and then pro rata the amount. That is the employee contribution to reduce your FBT to nil.

Step 8 – Book Employee Contribution

You have a choice. You can lodge an FBT return and then pay the FBT. Or you recognise an employee contribution for the amount and voila: No FBT to pay and no FBT return to lodge. Most sole sharesholders do the later.

The employee contribution is subject to GST. In the example it would look like this.

DRShareholder LoanBAS Excluded14,792.81
CROther IncomeGST on Income(13,448.00)
CRGSTSystem Generated(1,344.81)

If you set amounts to ‘GST inclusive’ in Xero, you don’t need to calculate the GST. The software does it for you.

Step 9 – Div 7A

You just have one last potential problem to deal with if you booked the employee contribution in Step 8. And that is Div 7A. If the company has a receivable to the shareholder at year end, you have a Div 7A problem.

So create a Div 7A agreement or reduce the distributable suplus to nil.

Summary

And that’s it. This is how you book a company car in Xero. In future years, you still have to deal with loan repayments and FBT employee contributions, but the rest is done and dusted.

Does this make sense? Please give me a call if you get stuck.

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Car Tax Deduction

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Your business needs a car, so it got one. The big question is tax. How do you claim your car tax deduction?

Car Tax Deduction

Working out your car tax deduction can be confusing. Here are 10 steps to get the highest tax deduction possible.

1 – Put Travel Aside

Everything that follows here is about car expenses (motor vehicle expenses to be precise), but not travel. The distinction between car and travel is important, because different rules apply. 

Motor vehicle expenses are fuel, oil, repairs, servicing, car wash, insurance, registration, interest and depreciation (or lease payments) and so on.

Travel expenses are road tolls, parking, car ferry or paying somebody for getting a lift and so on. If you incur these for a business trip, you get the full tax deduction.

So put travel expenses aside for now and focus on car expenses.

2 – Ownership

Whoever owns the car, gets the car tax deduction. 

If your employee owns the car, you get no tax deduction for the car itself. But you get a tax deduction for any car allowance you pay. Treat the allowance like any other wage payment. After that you are done. 

If you own the car, you get the tax deduction.

3 – Methods

Now it gets confusing. You need to choose a method to work things out. The problem is that there are four methods. Four!

Cents-per-km Method: You claim 72 cents for each business km – up to 5,000 km. That is your tax deduction.

Logbook Method: You log every trip over 12 weeks and work out your business percentage, which you then apply to your actual cost. That is your tax deduction. Your logbook is valid for 5 years.

Statutory Formula Method: You apply 20% to your car’s base value, possibly pro rata. That is your FBT taxable value.

Operating Cost Method: You keep a log book for 12 weeks and work out your private percentage, which you then apply to your actual cost. That is your FBT taxable value.

But not all of these four methods apply to you at once. 

4 – Tax Deduction

Which tax deduction is available to you depends on your business structure and type of motor vehicle.

Business Structure

If you are a sole trader or partnership, you can choose between the cents-per-km and the logbook method to determine your tax deduction.

If you are a company or trust, you get a full deduction for all motor vehicle expenses. Whatever you pay, you get to tax deduct. But….then FBT picks up any private portion of those costs. 

And to calculate this FBT value, you either use the statutory formula method or the operating cost method.

Type of Motor Vehicle

Everything we talk about here only applies to cars. Cars is anything designed to carry a load of less than one tonne and less than nine passengers.

Anything larger than this usually gets a full tax deduction and no FBT.

5 – Best Method

How do you work out which one will give you the highest tax deduction? The answer depends on your actual costs and private use.

Actual Costs

The cents-per-km and statutory formula methods don’t take your actual running costs into account. But the logbook and operating cost methods do.

So if your running costs are particularly high – high kms, fuel inefficiencies, a lot of repairs, expensive maintenance etc – then go for the logbook /operating cost method. If they are low, go for the cents per km / statutory formula.

The purchase price only matters if your car is below the car limit.

Private Use

The statutory formula method is the only method that ignores your actual private use and just assumes a fixed percentage. So if your private use is high – rule-of-thumb over 20% – go for the statutory formula method in a company or trust. If your private use is low, go for the other methods.

6 – Receipts

For the cents-per-km method you don’t need receipts. Just a reasonable explanation how you calculated your number of business kms.

For the logbook method you don’t need receipts for fuel and oil if you can show how you estimated those costs, but you need receipts for all other costs.

As a company or trust you need receipts for all motor vehicle expenses.

7 – Instant Asset Write Off

The instant asset write off rules give you a full tax deduction in the year of purchase (adjusted to your business % if a sole trader or parternship), as long as the purchase price is below the threshold.

This threshold is currently $150k until 30 June 2021. 

8 – Car Limit

You can only claim a car tax deduction and GST up to the car limit. The car limit for 2020/21 is $59,136 including GST, so $53,760 plus GST of $5,376.

For the cents-per-km method the car limit doesn’t affect you.

In all other cases it does. You can only claim depreciation (or the instant asset write-off) and GST up to the car limit, reduced by any private % for sole traders and partners. 

9 – Employee Contributions

This one only applies to companies and trusts. If the employee reimburses the company or trust for the taxable value they received, then the FBT is nil. If they don’t, then the company or trust has to lodge an FBT return and pay the FBT.

So most sole directors and shareholders of family companies pay the company the taxable value to avoid having to lodge an FBT return. There is usually no cash payment, but just a debit against shareholder loan.

10 – Div 7A

Booking the employee contribution against shareholder loan in Step 9 (as a company or trust) might give you a Div 7A problem, if you owe the company or trust at the end of the financial year.

If you (or anybody associated with you) owes the company or trust at year end, Div 7A wants to treat that debt as an unfranked dividend unless you have a Div 7A agreement.

So get a Div 7A agreement or reduce the distributable surplus to nil and voila: Your Div 7A problem is sorted. But for this one ask an accountant to help you.

Summary

So these are 10 steps to claim a deduction for your car. Just go through these step by step. And give me a call if you get stuck.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

 

paying employee accommodation

Paying Employee Accommodation

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You want to expand into another state and so one of your managers moves to the new location. To sweeten the deal, you start paying employee accommodation. You pay their rent. Sounds straight forward, doesn’t it?

Paying Employee Accommodation

The problem is that the tax status of these rent payments might take a little time to sort out. Paying employee accommodation, you have five options.

Option 1

Your employee rents the house and you compensate them. Either by reimbursing them or increasing their salary or whatever you call this extra payment.

The bottom line is that your employee can’t tax deduct the rent since a private expense. But pays tax on the extra cash you pay them to cover the rent. You on the other hand get to tax deduct everything you pay.

Option 2

You rent the house and your employee pays nothing extra.

Now you are in FBT territory. FBT stands for Fringe Benefit Tax. The rent payment constitutes a housing benefit covered by Division 6 FBT Assessment Act. And so you pay FBT on it.

You get a tax deduction for the full rent as well as the FBT you pay on the rent. Your employee’s tax return is unaffected.

You calculate the FBT as: Taxable value (less employee contribution) x 1.8868 x 47%

So let’s say the annual rent is $10k – no GST since residential rent. In that case you would pay $8,867.96 FBT ($10k x 1.8868 x 0.47 = $8,867.96).

Option 3

You rent the house but your employee reimburses you for the rent. Your FBT is nil: ($10k less $10k) x 1.8868 x 0.47 = nil. Your employee’s tax return is unaffected apart from additional tax on any potential wage increase.

Option 4

This one often gives you the best outcome. You use the temporary accommodation exemption.

You rent the house without any employee contribution. But you keep the arrangement limited to 4 or 6 months while your employee actively looks for permanent accommodation. In that case no FBT to pay and you still get the full tax deduction.

This exemption is usually limited to 4 months but can be extended with an employee declaration to 6 months or even 12 months.

Option 5

This one only applies if your employee keeps their old place and starts living away from home. In that case some or all of the rent and food you cover while away is FBT free as a living-away-from-home allowance for up to 12 months.

Does this make sense? Just give me a call if you get stuck.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.