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.
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Last Updated on 13 March 2021
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