Alright folks! It's your friendly neighborhood Tax Man, here to talk about a question often
asked by business owners like yourself:
“Should I be buying my car under the company or my personal name?”
So before I answer this question, I first need to explain why people ask this question.
Most business owners believe that they can claim more tax deductions and get tax back
by buying a car under the company name. I don’t always agree with this and it really
depends on the situation.
SO DO NOT BUY A CAR IN THE COMPANY WITHOUT CONSULTING AN ACCOUNTANT FIRST.
Let's talk about examples. If you are buying a Lamborghini in your business name, it's
actually 9/10 times a bad decision. If you are buying a ute in your business name, most
of the time it’s a good decision. So let's talk about how car purchases affect
the tax for a business.
Generally, the taxes that are affected are the following:
Number 1: Income Tax.
Do you receive a tax deduction so you can offset your profits and reduce the amount
of tax you need to pay for the year?
If you purchase a car and use it for business, you are only able to claim the business-use
portion as a tax deduction. I will explain this in more detail but if the car is subject
to FBT, then you can ignore the personal and business portion.
Cars are fixed assets for a business or individual, so you have to claim it using depreciation.
When you depreciate the car you claim it over the useful life of the car, which is normally
8 years.
One advantage of buying under a business is that you can use small business simplified
tax rules, which allows business to claim 100% of the vehicle upfront, minus the personal
use portion. So they don’t need to claim the car over a number of years which is also
called, “depreciation.”
Number 2: GST. Since you are a business, you get to claim
the 10% GST credit back from the ATO, but you also have to pay 10% GST on any car sales
made in the business.
When you purchase a car under your business – majority of the time you are running the
business in the company, so the company will be registered for GST, but you personally
won't be. So buying it in your name, will result in you losing out of the GST credit
of 10%. Whereas buying the car in the business will give you the opportunity to claim the
GST on the car, but only up to the car tax limit, which is normally $59,136. So the maximum
GST you can claim is $5,376. However, it's only when you buy the car from a business
or dealer that you can claim GST, as they will have GST on the sale of the car.
Which brings me to the next point, it's kind of like a double-edged sword. If you purchase
a car in the business and decide to sell it later, you will have to pay 10% GST on the
sale of the car as well. In this case, there is no limit. So if you purchase a $200,000
car in the company you can only claim GST of $5,376, and if you sell it later for $165,000,
you will have to pay GST to the ATO of $15,000. It’s not that great, is it?
And lastly, let’s talk about Fringe Benefits Tax. This is a 47% tax on personal benefits
received by employees and directors of the company and their family members.
This tax is separate from income tax and thus, is an extra tax the company is required to
pay on top of income tax. So what does this mean?
Basically, by buying a car through a company in an attempt to make tax savings, this has
resulted in the company paying FBT of 47% for the personal use portion of the company car.
In my honest opinion, FBT is never a good tax for the business owner. This is because
the tax is usually at the highest tax rate of 47%.
The only good thing is that the 47% tax is, it’s only imposed on the personal-use portion
of the motor vehicle. The business portion is excluded from this tax.
So let's use an example and I am going to explain as basic as possible. Please note
that the tax systems involved such as Income Tax, GST and FBT are a lot more complicated
than how I explain it. I’m just doing this so it’s easier for you to understand.
Say an individual purchased a car for $50,000 and used it for business 50% of the time.
In the scenario where you purchase the car in the individual name you can claim the car
over 8 years, but only the business portion of it.
For example: 50,000 x 50% divided by 8 years = $3,125 tax deduction a year.
In the scenario of the company purchasing the car, you can claim the car immediately,
but only the business portion of it. So $50,000 x 50% = $25,000
However if the car is subject to FBT in the company, you can claim $50,000 which is 100%
of the car. If the car was worth $200,000 or $400,000, you can only claim up to the
car tax limit for both the individual and the company which is $59,136.
Okay now on to the GST. If the car was again $50,000 in your personal
name there is no GST claim back. In your business name there is a GST claim of 10%. So if you
purchase the car from a dealer or business, you get to claim $4,545.
So let's bring back the Lamborghini example. If you purchased a Lamborghini for $400,000,
you can only claim GST of $5,913. But when you sell the car, you will have to pay 10%
to the ATO.
So selling the car for $330,000 means you have to pay GST of $30,000. Not really a good
position to be in it right?
Now, here’s FBT on the $50K car.
So assume you purchased a $50,000 car in the business. Basically, the personal use portion
of 50% is taxed at 47%. But it's not just the car value that is the benefit you are
receiving for the car. You are also receiving the benefit of the running cost, repairs,
insurance and other car expenses for the whole year.
If you work out that the car depreciation and expenses for the whole year is $30,000
in total, then you will have to pay: $30,000 x 50% (personal use portion) x 47% (tax rate)
= $7,050.
Please note this calculation has been simplified and is not really the way FBT is calculated.
There are a few more adjustments made but it's just to show you how the idea works for FBT.
The FBT can be very high, as you can see. There is a way around this, which is when
the employee pays back the personal use portion to the company. But it’s best to speak to
an accountant about this method. It's called the Employee Contribution Method.
Here are a few common examples as a guide. If you are planning to buy a car at a price
of $0 - $100,000 from a dealer and plan to keep the car for 3 years or more, then it's
probably a good idea to buy it in the business.
You can write off up to the car tax limit of $59,136 as income tax deduction immediately,
and claim GST of up to $5,376 in GST. However, you will need to deal with the FBT
tax and possibly use the employee contribution to minimise the FBT that you need to pay.
Here’s Scenario 2.
If you are buying a car for $0 - $50,000 from an individual, more than likely there will
be no GST on the car purchase because you’re buying it privately.
If that's the case, it may not be worth buying it in the business as you do not get to claim
GST when you sell the car. And when you do sell the car, you’ll have to pay GST on
it.
Also you will need to deal with FBT tax which is at 47% tax rate. It’s quite high. It
may be a good idea to purchase it in your personal name.
Here’s Scenario 3.
If you are buying a Lamborghini for $400,000 - do yourself a favour and just buy it personally.
If it's in the business, GST will be huge if you sell it. The Lambo is only income tax
deductible up to the car tax limit of $59,136.
FBT tax will be a big issue as well. It’s just not worth it. Just buy it in your personal
name.
Here’s a very common example for Scenario 4.
If you are buying a ute, truck or a van, there is a high chance it's considered an FBT-exempt
vehicle. Which means there will be no FBT tax on the vehicle. You can claim a GST credit
on the vehicle as well. There is also no car tax limit on these types
of vehicles, so it's best to purchase this in the business or company, so you can claim
100% of the vehicle against your income.
Okay. As you can see, it is very confusing. It's best you speak to an accountant, like
myself. But the first thing you need to consider are the following questions when you want
to purchase a company car:
Will the car be for private or business use?
What portion will it be for private or business use?
Does the car purchase include GST?
What type of car is it? Sedan, ute, truck or other?
What is the business activity of the company?
Who is the company car for?
Where is the company car parked after work hours?
Is it a FBT exempt motor vehicle?
Does the employee require a company car?
Are you planning to sell the car in the future, and if so how much?
All the questions above will impact whether you should buy in your personal or business.
Find out all the answers, and go speak to an accountant to save yourself the headache
and the heartache if you pay too much tax later!
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And if you have any questions or want me to cover any specific topic, leave a comment below!
Thanks, everyone. See you next time!