Buying a Car to Save Tax

Hi Guys,

Any accountants or experts who can give me advice please. Our business has a new profit of 250K this financial year. We have made purchase on some machines, plus bought a car ( Audi q3 ) and paid super into both directors account. We still have about 100K net.

The accountant gave us 2 options:
1) Buy another car upto 57K
2) Put more into super. We can add another 20K each for 2019 as we did not put much in ( Hus/Wife ) business partners.

Option 1 buying a car ; I buy on loan so cashflow stays in the bank account.

Option 2 super contribution : I push out another 50 K which can affect the cashflow as we try and expand next financial year.

Accountant said on 100K net we will pay 34.5K, on 50K we will pay 17.

So essentially saving 17 k on tax if we buy a second business car plus GST ( 22 k for a 57K car ).

Does anyone have any other solutions to save money rather than buying a car?

Thank you in advance.

Comments

  • +48 votes

    How about buying something for the business that will actually generate income for you?

    • +1 vote

      Thanks mate, will prep a list now of what else I need😃. I have already put 100K worth of gear this year but will het more.

  • +15 votes

    If it was me then I would buy machines worth 57k that would allow me to have an edge on the competition.

    As for you,just buy another Euro and be happy.

    No one made money by buying a car.

    • -13 votes

      Uber drivers? Taxi drivers? Wedding car hire?

      • +3 votes

        Only the last one makes any actual money.

        • +10 votes

          Plot twist: OP has a wedding car hire business

    •  

      Thanke mate.

    • +1 vote

      No one made money by buying a car.

      I've had 2 mates called by the dealer that sold them their 200 series landcruisers offering them more than they paid.
      Both <12mths old

      • +6 votes

        That's o ly because covid though so that's a unique situation

    •  

      Westpac?

  • +18 votes

    Ask your accountant about fringe benefit tax

    • +8 votes

      This. There are only three reasons to spend business profit on non-business essential cars: 1. you are the director but other people are the shareholders so you are spending others money (doesn't sound like that's the case here), 2. you are about to commit tax fraud by not declaring FBT, and 3. you work for Westpac and cars are appreciating assets.

      •  

        please clarify your point number 3! I don't think it just any cars, it's gotta be AMG from memory, but I could be wrong.

        • +2 votes

          Incorrect, it's a BMW.

          Don't you know tax laws?

    •  

      Everyone I know who purchases vehicles for 'business use' commmit tax fraud. Their cars are used to ferry kids around, grocery shopping and pay absolutely 0 FBT. I don't think the ATO really goes after it, unless you're randomly selected or have a large anomaly in your numbers one year.

  • +8 votes

    Ask yourself if it makes commercial sense to buy it, rather than starting from a tax point of view.

  • +2 votes

    Does anyone have any other solutions to save money rather than buying a car?

    Invest - pick an asset that you believe will grow for you and that will in turn fix your tax problem and also create wealth for you.

    Personally i'm a property guy - I negatively gear thus saving in tax and accumulating wealth. But the same principle applies to shares etc.

    Don't be the guy with half a dozen cars in the driveway. Yes you've saved in tax - but think about what you have really achieved…

    •  

      How can I buy property for business? and befor June 30.

      •  

        Don't buy it for the business - buy it for yourself. The impact will be the same.

        This isn't going to fix your current problem - the silver lining to your current problem is the banks will look favourably towards it so that you can buy something.

        My suggestion above is a long term fix and doesn't alter the past. Start today so you can fix tomorrow.

      • +4 votes

        Assuming your business is a company, i.e. pty ltd, then it can own assets just like how individuals can own assets. However companies do not get CGT concession when you sell the property years down the track, so the accountant might be against it.

  • +11 votes

    The car will be worth nothing in 10-15 years.
    Super should have accumulated compound interest at 5-10%pa, at least double in value.

  • +2 votes

    First - speak with your accountant. They are getting paid to provide you with professional advice, knowing all of your financials.

    So for some unprofessional advice, which is worth as much as you pay me to provide -

    Option 1 If buying a car with a loan, you will only be able to deduct interest.(First interest would be in next financial year) You need to pay for it full now.
    Option 2 Super Just pay into super what you are comfortable with in relation to your expected cash flow.

    No use having a car in the drive or to much money tucked in super if you need the the cash to run your business, just to save some money on tax.

    •  

      I can write of the whole car upto 57K due to govt assett write off option. Loan would work the same way as the company paid for it.

      I agree re the car thats why I put this up so I can find other options mate.

    • +1 vote

      "Option 1 If buying a car with a loan, you will only be able to deduct interest.(First interest would be in next financial year) You need to pay for it full now."

      Incorrect

      •  

        Concur.

  •  

    Using the company treasury to buy the best-performing asset class of this decade, use it as leverage to accumulate more assets or lend it out for yield would be financially justifiable.

    •  

      Can you simplify it a bit for me. I understand buying assets but unsure what can I buy.

      •  

        It's not going to help what is suggested is not a tax deduction

  • +7 votes

    Change accountants to one with a more practical outlook

  •  

    If you just end up need to pay tax for the company profits, next year you can withdraw as dividend and those tax paid as franked amount. Please correct me if I'm wrong

    •  

      or keep the retained earnings until you stop actively working in the business / lower income years, and then pay yourself dividends

  • +6 votes

    First of all congrats. Not many people in Australia in position where making "too much money" is a problem.

    But dude….. what the hell?

    Put 40k into super which will be taxed 15% (this is no-brainer) and the rest, 60k, just pay tax on it.

    You are worried about cash flow the next financial year? Do not buy company vehicle you don't need. Especially on finance which is another cost. With this kind of attitude, you will be lucky for your business to break-even in 2 years when you are fattening it so recklessly. Keep your business lean and simple. Max your concessionary super contribution, pay yourself just enough to stay under top marginal rate and if there is anything left, retain it in company structure (or distribute it to a company) and pay corporate tax on it.

    •  

      Spot on mate!

    •  

      Assuming their current contributions are under 5k each then it would be 15%

      " Our business has a new profit of 250K this financial year. We have made purchase on some machines, plus bought a car ( Audi q3 ) and paid super into both directors account "

      If he has already put in $25,000 each it wont be concessional anymore

  • +24 votes

    If your accountants advice, a professional who has trained and does this 40 hours a week, is so questionable you come to the internet asking for help I'd seriously consider a new accountant.

    Paying $57k to get back $17k is not saving money, it's spending $40k on a car you potentially don't need. Your accountant doesn't happen to spend a lot of time on Ozbargain, do they?

    • +1 vote

      I was going to comment that same thing.

      What everyone doesn't understand about "paying taxes" is that we're going to pay tax regardless of the income we receive. Tax is adjusted to the income we receive. You may well need this income for an urgent payment that life could bring.

      Or just re-invest in your business, very simple imo.

    • +1 vote

      The accountant isn't that dumb. They are just trying to protect their fee income.

      If you got a client who want to pay no tax or less tax the best way is to tell them to spend it. Having money burns a hole in most people's pockets. In fact our society depends on it. If everyone horded their money we'll end up like Japan.

      Zero interest rates, QE, unaffordable housing. Lucky stock market is holding up and consumer spending.

      • +1 vote

        You’re really not doing much to convince me that it’s good advice.

        I never said the accountant is dumb, just it’s bad advice. Advising that spending money to save on tax is just plain obvious, and they should be looking at what will increase profitability and the amount of money in their pockets, not splashing money on a car that doesn’t appear to be necessary.

        And they definitely shouldn’t be giving advice based on what’s good for the economy. Do you keep any savings and investments? If so you’re bad for the economy, stop doing that.

        It’s the governments problem to encourage spending, not their accountant.

  • +2 votes

    Congratulations on your awesome income. You have worked hard so I can understand why you are looking at ways to reduce tax.

    Some things to consider
    -prepaid expenses (you can prepay your accountant, leases, subscriptions, utility bills and alike)
    -purchase business assets to get access to the small business instant write off.
    -donate money to registered charity
    -do nothing and hand money over to government via additional taxes

    Assets have to have a connection to work. The ATO would frown upon a physio spending $50k on home cinema/projector setup at home. But they could easily spend that on physiotherapy equipment easily to setup another size hustle.

  • +3 votes

    Are the car's 100% used for business purposes?
    But yeah, buying cars for tax purposes isn't smart, unless you're a tradie, in which the government is practically telling you to go and buy a brand new Ford Ranger that you can write off. Hence why utes dominate the car sales top 5.

    Really is nonsensical for the government to be doing this and not permit electric vehicles to be part of the program.

  • +4 votes

    There's no point spending a dollar to save 30 cents.

  • +3 votes

    Buying a car (that it sounds like you don't need) seems very odd advice. It is also technically illegal to purchase an item solely for the purpose of tax minimisation. Hard to prove if you got audited, but this post would assist!
    As many previous posts have said, invest the money in an asset/s that will build your business/income. Without knowing your business, a car seems to be a strategy aimed to solely reduce your tax liability, which is strange in my book.

  • +1 vote

    Buying a car you don't need seems a crazy idea. Put money into super and prepay expenses where possible. Going into anything just to reduce tax is not sound business…..any purchase should stand on its own merits, not just to reduce tax.

  • +1 vote

    any purchase should stand on its own merits, not just to reduce tax.

    Couldn’t agree more. Always assume you will never get a tax deduction and then ask yourself “would I still be making this decision if not for that?”.

  •  

    If you buy a car and sell it say in a few months time while it's still new.. technically you are still profiting from the less tax paid. does this work to say buying a car earns money?

    • +1 vote

      Not really as you have to declare any profit and pay tax on that…

      •  

        Is there a reason why 57K is the magic number?

        • +1 vote

          That’s the depreciation limit for motor vehicles. Can’t claim any higher than that

  • +1 vote

    Just buy a couple of Cartier watches.

  •  

    I doubt you can expense off the car loan in one full amount. Unless you pay off the car with your company cash and then take a business loan for that value.

    RED FLAG, buying two high value passenger cars in one financial year is just asking for trouble and more troubles

  •  

    Option 3: retain the profits on the balance sheet. This year was good, but future years may not be.

    • +2 votes

      Income need to be taxed before being retained. Ops is trying to avoid paying tax.

  •  

    Does anyone have any other solutions to save money rather than buying a car?

    Not buying a car will definitely save money. I think its a bit short sighted to buy things or do things based on tax reasons alone. When you think about it, does it really make sense to spend $57K to save $17,500?. You could not buy a car and actually save $39K. But putting it into super is the smartest tax option if you haven't hit the cap.

  •  

    You're not saving money if you don't need the car. Keep that in mind.

    Sure if currently your personal vehicles aren't under the business and you can get rid of one and pretend you use the new one for business purposes that might make sense……but realistically If you don't need it it's a loan you're paying interest on despite the tax deduction.

    Now if you really want this car, and you can save some tax while you're at it then I'm all for it.

    But spending money to save money on tax isn't really a thing unless that item furthers your business / generates revenue / has some tangible benefit.

  •  

    https://www.ato.gov.au/Individuals/Super/In-detail/Growing-y...

    Option 2 will create a significant tax obligation for the directors, if you’ve already been shovelling money to them.

  • +7 votes

    Hi Guys,

    Thank you so much for all the input. I had already decided I will not buy a car but went for a test drive. Drove an M2 - while I was test driving the post and answers on OzB along with my own thought process made me hate the car so much we just stopped the test drive mid way and I came back home. I have made a lost of things I can buy for the business. Someone suggested meet a FP here so will book one in before June 30 to prep up for next year.

    Some things I came up since yday was:
    New computer for our admin
    New phone piece and headsets
    New machine worth 35K
    Put some more in super
    Pay rent and super for staff in advance

    Any other helpful tips would be greatly appreciated. Lucky I asked here, it just clarified my thought process a lot more.

    Thank you guys😃

  • +1 vote

    So essentially your accountant has advised you to assume a new ongoign liability (car loan x 5 years) so u can reduce a liability? (tax). Not the end of the world if your profitability continues however if you suffer lean times you have an ongoing liability that you will need to support, amongst others and this inevitably leads to the walls closing in for business owners who wind up. Keep your expenses lean and your exposures will be minimal so if a downturn ocurs you can ride it out.

    I would sugggest find something income generating for the business (even more equipment or upgraded systems etc) or put it in your super, no car. This is a trap many business ownerss fall for so they can flex muscles to people who dont even pay attention with flashy toys. Car is nice but youll get over it pretty quickly.Just invest in either your business or yourself via super for the future, youll thank yourself later.

    But to spend money to save a little back doesnt seem to be prudent business, particularly in these unceratin times.

    Keep up the good work and all the best

  • +1 vote

    The only benefit to buying shit to save tax is when you want a new toy and you use the excuse I can save on tax to the wife to get what you want . Else your spending 3x the amount of money to save some tax whICH leaves you a way higher percent down than paying tax if you don't need to.buy something. My accountant said it's still costing you 70c in the dollar

  • +1 vote

    People talk about big companies not paying taxes, small businesses like this doing the same thing buying things they dont need just to save tax. On the other hand the gov is helping to do that anyway so why not, instant asset writeoff is a lottery for most businesses these days.

    • +3 votes

      Yes but if OP and other small businesses buy a car or two it keeps ppl like spaceback employed, and dont worry the car manufacturer is paying tax the dealership is paying tax, and so is the salesman, so yeh relax the government is not missing out.

    •  

      lol you think gov missing out on tax? Everything we buy have tax on it. Remember there are two things that are certain in the world, death and tax, well three if you live in Sydney which is toll.

  •  

    Just throwing a random idea around, what if OP bought property personally and rented it out to the business with say a 5 year lease term payable up front. This way op still retains cgt discount in future if they want to sell.

    • +1 vote

      The general CGT discount is based on time the asset is held (>12 months). In this case the deduction the business can claim (questionable) would be income for OP individually so not tax effective.

  • +1 vote

    Firstly, consider rewarding your staff for the stellar year you've had…lest they seize the means of production. Remember that any JobKeeper you received is taxable but Cash Flow Boost is not.

    Given you've said your tax rate is 34.5% (32.5% + Medicare Levy), you must be running your business as a trust. If you have surplus cash, and no beneficiaries you can distribute to, consider a bucket company. Bucket company will pay tax at a maximum of 30%, but that tax will be "saved" so that when the bucket company eventually pays dividends, the tax "saved" is attached to the dividend as a franking credit.

  •  

    Let me know if I get this correct. Say one of the director doesn't work at all for the entire year. Thus $0 income but the company can put $25k (the max amount?) Into the director super as salary sacrifice. $25k is expensed at company level, on personal super this $25k get taxed only at 15%? I'm aware in the case of $0 income that $25 is better off claimed as wages, just for the case above the income is simplified to $0.

  • -1 vote

    buy bitcoin

  •  

    Super

  •  

    Just buy the unnecessary car. Us psi income earners will do all the heavy lifting for the rest of you

    What a stupid tax system

  •  

    Eneloops

  •  

    Prepay expenses like supplies, materials etc

  •  

    I have my own company with similar numbers with similar issues. Another company car would need a 3-month logbook of business use, which may be possible if you use the new car exclusively for business whilst leaving the existing company car ( with its logbook already complete) in the driveway. A tesla model 3 would probably lose the least for a 24-month lease.

    I choose super, 15% tax and you do more than $25K this year if you haven't contributed 25K every year since 2018 (ie $75K combined in the last 3 years for each of the directors ). I have a LOC on my home to protect the business if there was any cash flow crisis ( cost is $750/year for the LOC), so I don't worry about drawing down my company account at the end of each financial year.

    The bucket company suggestion is something I am investigating.

    •  

      Bucket company is a great option but really it's kind of the last line of defence once you've maxed your concessional contributions, written off assets and deferred any income to next financial year (although I generally don't reccomend deferring income).

      Ideally if you're operating under a company structure you want a trust to hold the shares so that when the company pays a dividend the trust gets to choose how much goes to the bucket company and how much gets paid to other beneficiaries.

      Also be mindful that to take advantage of the carry forward concessional contributions your super balance has to be below $500k.

  •  

    Are you Amit Ch********?

  •  

    Not enough details to really be able to get the situation, as in

    • no idea what the business structure is ie are you two the only directors? are you also shareholders or do you have a trust as the shareholder ?

    • do you have kids and are any 18+?

    • do you have any other income + what have you paid yourself as directors

    • Have you already made contributions to super and how much? is the 20k you're referring to the Carry-forward concessional contributions?

    • how's your franking account sitting?

    • what is the nature of said business.

    but im gonna assume you're talking about Carry-forward concessional contributions in which case if I was in a situation similar to this I would be asking the question.

    do I want another car??

    no? Super yes? Car

    unsure, super

  •  

    The whole concept of buying things to save tax is a fallacy on its own, you don't save tax but merely using what was the ATO's cashola to subsidise what you've purchase. If you don't really need it, you're blowing more money for the sake of ATO not getting a cut but they will via GST anyway.