We often have business clients come to us with questions around purchasing a motor vehicle under the business and how they can reduce their tax burden when doing so. The part of this transaction that is often overlooked is what happens when and if the client were to choose to sell the vehicle.
Eligible businesses can currently claim the instant asset write off when purchasing a vehicle, up to the luxury car depreciation limit.
When applicable, the depreciation limit applies to cars, station wagons and four-wheel drives. Under the Income Tax Act 1997, a car is defined as a vehicle designed to carry a load of less than one tonne and fewer than nine passengers. For the 2022 financial year, the car depreciation limit is $60,733. This means if you purchase a vehicle for an amount greater than $60,733 you are limited to claiming a maximum tax deduction on the vehicle of $60,733.
Commercial Vehicles that aren’t Cars
A vehicle that has a carrying capacity of more than 1 tonne and is not primarily designed to carry passengers, is defined as a commercial vehicle. When purchasing a vehicle of this type, the entire cost of this vehicle can be depreciated/claimed. The luxury depreciation limit will not apply to a commercial vehicle, meaning regardless of the price you can claim the full cost.
The often-overlooked aspect of a motor vehicle acquisition is what happens when it comes time to sell or trade the vehicle in for a new car.
If you have previously claimed the instant asset write on the vehicle, the eventual sale price or trade-in value becomes business income and will be included in your tax return with the relevant amount of tax payable. With vehicles now retaining (or sometimes increasing) value, we are seeing many clients with a tax bill as a result of trading in or selling their vehicles.
It is important to also remember when the vehicle is sold or traded-in if you are GST registered there is also GST to be paid on the sale proceeds.
As always, if you have questions or concerned about purchasing a car in your business name, do not hesitate to contact us on 07 5451 1118 or email firstname.lastname@example.org