We have heard them all, but the tax accountants here at MJJ Accounting uncover the truth on our favourite motor vehicle myths. Thank us later.
- Buying my vehicle through my business is always the best option.
We all know someone who has said that buying your new vehicle through your company (or trust) is the best option. However, if the vehicle is used for private purposes, a contribution is required to be made to cover private usage to avoid fringe benefits tax. Generally, there is going to be some private use, and the mere availability of the car for private use creates a fringe benefit.
Unless a logbook has been prepared, the deemed private usage will be an amount equal to 20% of the cost price of the car (the cost price of the car is reduced by 1/3 after owning it for 4 years). For example, if you purchase a car for $70,000 and don’t keep a logbook. This would mean the taxable value of the fringe benefit calculated according to the ATO statutory rate method would be $14,000 – of which $12,727 would be recorded as taxable income and $1,273 would be included on your BAS as GST payable.
The company (or trust) will still be able to deduct all motor vehicle costs such as depreciation, all operating costs (fuel, repairs, registration, insurances etc), and in addition to that, if registered for GST, claim the GST input tax credit on the vehicle cost and some of the ongoing operating costs.
On the other hand, if you purchase the vehicle privately, there is no consideration for a fringe benefit. A logbook would be required and the business use % of your expenses would be claimed as a tax deduction in your own name. If no logbook is kept, then you would only be able to use the c/km method to claim a deduction for your vehicle travel, which is capped at 5,000km.
- I can get an immediate deduction for my $100,000 car under the new instant asset write off rules (Luxury Car Limit)
The new instant asset write-off rule allows eligible businesses to claim an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use. For assets first used or installed ready for use between 12 March 2020 until 30 June 2021, and purchased by 31 December 2020, the following applies:
- Eligible businesses are those with aggregated turnover of less than $500 million
- Threshold for the amount available to be written off for each asset is $150,000
However, for cars, you need to also consider the car limit. This is the maximum depreciation you can claim for a car. For the income year 2020-21, this limit is $59,136. The excess amount over the limit is not available to be claimed under any other depreciation rules.
If you are registered for GST, the maximum GST that can be claimed is 1/11th of the limit (i.e., $5,376). The rule is: the available depreciation is the lower of cost limit and the gross price of the car less the claimable GST. So, if you purchased a car with a cost exceeding the limit, claim the maximum GST claimable and claim the remaining cost of the vehicle up to the car limit of $59,136. To summarise the basic scenarios, please see the below table:
Based on the table, it can be deduced that vehicles exceeding the cost of $64,512 (GST included) will result in an excess spending that has no tax impact.
- I don’t need to keep a logbook because I have a Ute/Work Horse vehicle
Unfortunately, logbooks are required for all vehicles – even Utes. Whilst in the past the ATO have been rather relaxed about requiring these, they are tightening-up their approach on these vehicles in particular (inc vehicles that can carry over one tonne). This is due to many business owners purchasing dual cab utes to be able to pick the kids up from school and use on the weekend for sports drop offs and camping/4WDing.
Even if the vehicle is primarily used for work, these days you need to prove any private usage is ‘minor, infrequent and incidental’. According to the ATO, any travel that deviates from a normal route between home and work (by more than 2kms) will be considered private use. The ATO stance is that if you don’t have a Logbook to support the business usage they can deny the claim in full (ie you can lose the full tax deduction for all vehicles costs). So, whilst it is an annoyance to complete a logbook, it’s important to be able to claim any vehicle costs.
The logbook can be purchased from newsagents or Officeworks for roughly $7, or alternatively there are some Apps that can be used to record the trips. The logbook is required to be kept for 12 weeks, but then it can be used for 5 years (unless the vehicle usage changes significantly).
Keeping the logbook will provide the extra protection if the ATO decides to audit you or argue that you are not entitled to a motor vehicle claim.
No logbook = No motor vehicle claim
I can just estimate the business use of my car and don’t need any records to prove it
The ATO is paying very close attention to motor vehicle deductions each year, especially when you claim a percentage of total expenses. Below we will cover what records you need to keep in order to claim the 2 types of Motor Vehicle Deductions – Cents per km, and Logbook method.
Cents Per Kilometre Method
Using the cents per kilometre method, you claim a set rate (72c for the 2021 Financial Year) per business kilometre traveled on your tax return. There is a maximum amount of kms you can claim per vehicle, currently set at 5,000km – so the maximum deduction you can claim is $3,600 per vehicle.
You will need to keep written evidence, such as a work diary, to show how you calculated your business kilometres. If 2 people use the one car, the total km you can claim is 5,000 – for example, if you and your spouse both use the one car you can each claim 2,500km assuming you have the relevant records.
This method is mostly used by people who are employees and only have small amounts of business travel, or people who use cars with high personal use so the logbook method doesn’t suit them.
Please note the cents per kilometre method cannot be used for vehicles owned by companies or trusts.
The benefit of the cents per kilometre method is the smaller amount of evidence required compared to the logbook method, with the downside being that if you use your car substantially for work the deduction is capped at $3,600.
- Logbook Method
Using the logbook method, you record all the expenses incurred for your vehicle throughout the year – this can include buying a new car, interest on any loans, fuel, registration, insurance and repairs.
You must then keep a logbook for a continuous 12-week period, recording all your business and personal kms, which is then used to work out your business use %. For example, if you traveled 400km for business and 100km for personal your business use would be 80% (business km / total km). Logbooks last for 5 years, so even though it can be a hassle to prepare it can be worth it in the long run.
Please note that if your situation changes (buy/sell car, change in work habits/type) you will need to keep a new logbook even if it is before the 5-year period.
For all expenses except fuel, you must keep written evidence, usually a receipt, for each expense claimed. For fuel, you can use receipts the same as everything else, or you can estimate your fuel costs based on odometer readings (such as, kms traveled x fuel efficiency x average fuel costs).
This method is mostly used by people operating as sole traders/companies, or employees with very high work use.
The benefit of the logbook method is that if you incur significant vehicle expenses you can claim a higher deduction than the cents per kilometre method. The downside to the logbook method is the increase in records that need to be held in order to claim the expenses and business use %.
If you have any further questions around Motor Vehicle Deductions, please get in contact with our expert team of accountants in Maroochydore on 07 5451 1118.