Buying a Car, Deductions and Fringe Benefits Tax
In a previous blog on car expenses, we touched on buying a car in your company and possible FBT (Fringe Benefit Tax) implications of providing cars to your employees. Let’s jump in and explain it in more detail.
Is a car an asset?
Yes, a car is considered an asset to your business (even if it feels like a liability because it’s constantly breaking down!). It helps you earn taxable income by driving you to business related destinations.
What can I claim as deductions?
Depending on your circumstances, you might be able to get a deduction for things like depreciation, petrol, repairs and maintenance. In our blog on car expenses, we put a lot of detail into the car expenses you can claim as deductions, how to calculate the deduction, and in what capacity you want to claim (i.e. employee of a business, sole trader, company etc).
If you are a small business, you may also be able to claim the cost of purchasing your car as an instant deduction. This is known as the Small Business Write Off. There are plenty of rulings around what and how much can be claimed as an instant deduction.
What entity should I buy my car through?
This decision will always depend on your own personal and company tax situation, so it is always advisable to get taxation advice before making sizable purchases.
Generally speaking, if your employees would only use a company car for 10% business use, one option would be providing them with a car allowance instead of buying them a car. If your employee is on the road all the time, then supplying them with a car might make more sense.
Always talk to your accountant - they’re happy to help!
How can I buy a car?
Generally speaking, there are two main ways to purchase a car:
- Outright purchase
- Hire/purchase (loan) agreement
The outright purchase, assuming you have the cash on hand or money in the bank, can be the cheaper option. You pay all the money upfront, meaning there are no further repayments or interest charged. You own this asset from the day that money exchanges hands.
Hire/purchase agreements can be great if you don’t wish to tie up cash in fixed assets. Generally you pay monthly repayments (principal and interest), which can mean that you end up paying more for the car. You might be able to claim the interest portions of the repayments as an expense to reduce your taxable income. Unlike purchasing the car outright though, you do not own the car fully until you have paid the entire loan down. To account for the interest vs principal portions of the repayments, you will need a pretty fancy spreadsheet because while the total amount paid is the same each period, usually the earlier payments are made up of more interest than the later ones.
If you want to upgrade your car, most dealers will offer you a ‘trade in’ option. This means that they value your car and take it off the cost of the new car you wish to purchase. You can still choose which purchase method you wish to use. Trading in a car will decrease the purchase price of the new car, meaning if you choose the outright purchase option, you will pay less upfront, or you will pay less interest if choosing the hire purchase option.
As always, consult your financial professional to make the best decision and for their help in preparing that fancy spreadsheet.
Personal Use
If you have purchased a car in your business, and you use it for personal trips, you must apportion the deduction using your business to personal percentage. The way to do this is to keep a logbook, documenting all trips (business and personal) for a 12 week period. This will also help you calculate your Fringe Benefits.
Fringe Benefits Tax
If you provide your employees with cars and they are not 100% for business use (your employee can use them for personal trips), then you must register to pay Fringe Benefits Tax.
With cars, there are two ways to calculate the taxable value of the fringe benefit:
- The Statutory Formula Method
- The Operating Cost Method
The Statutory Formula Method is based on the car’s cost (purchase) price. You must use this method if you have not kept a logbook or receipts during the financial year.
The taxable value of your car fringe benefits is calculated by taking 20% of the base value of the car (i.e. the amount you paid to purchase the car) and deducting any amounts that the employee contributed for the operating costs.
For example, you provide your employee with a car, allowing them full private use. It was purchased for $40,000 (inc GST). The employee contribution was $1,000.
Therefore, the taxable value for the fringe benefit of the car is $8,000 (20% of $40,000) minus $1,000 = $7,000.
The Operating Cost Method is calculated using the costs of operating the car. To claim this method a logbook must have been kept for at least a continuous 12 week period - this helps to calculate the percentage attributed to private use. The taxable value of your car fringe benefits is calculated by taking the total operating costs (i.e. petrol, repairs, insurance), the percentage of the car used for personal use and deducting any employee contributions.
For example, the total operating cost for the employee’s car was $10,000. According to the employee’s logbook, their car is 25% personal use. The employee contribution was $1,000.
Therefore the taxable value for the fringe benefit of the car is $2,500 (25% of $10,000) minus $1,000 = $1,500.
You can use the method that provides you with the lowest taxable value, regardless of which method you have used in the previous financial year. Based on the above examples, you would use the Operating Cost Method (assuming you have kept a logbook) as it provides you with the lowest taxable value.
We're not saying don't buy a car. If you need one, then it is absolutely worth exploring what you might be entitled to and what reporting you might have to do.
As always we are here to help!
xxx
Lauren
(and co-author Caitie Copley)
