Tax Benefits - Purchasing a Car through Company

We have opened up this pty ltd for 5 years now but really, the business just started to take off from this financial year and weregistered for GST from July 2021. We operate from home. Our accountant suggested us to buy a car through the company and get a car loan (100% or maximum loan amount) and change the car every 3 years. I have tried Mr Google but I am still quite confused. Here are my questions.

  1. I understand the instant asset write-offs, tax deductions for the loan, fuels, rego, insurance, etc. However I actually have a private car in my name and it’s working fine, it feels like I am paying for a new car just to offset my tax but I am still spending money on a new car (which I actually don’t require at the moment), is it worth it? How much roughly can I save? We estimate the turnover will be approx. $80k this FY. I know a lot of people own business do this and they all said it’s worthwhile and you can “hide” a lot of costs (not sure what they are) – I really can’t get my head around this though, am I missing something?

  2. We both got our day jobs and this is just a side gig, so we won’t be driving the car for “business purpose” daily, however wifey will use the car to do school runs, supermarket runs etc, probably 50/50 between business and personal use. I understand personal use will attract FBT, but seriously how does ATO track whether I am using it for business or personal? And if they do, with the 50/50 ratio, is it still worth it?

  3. We always buy cars outright because we think paying interest on a depreciating asset is somewhat unnecessary and not money smart (we do have a home loan). However I understand interest rates for car loan is not much more than home loan and tax deductive and it frees up cash to do whatever something else. Would you get a car loan if you can pay cash for it? Won't struggle after paying cash but of course it hurts a bit to see when a large lum sum disappear from your account.

Thank you and I am open to ideas.

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  • +9

    Probably lease it…

    You should be asking your accountant this, not random people in forums…

  • Why don't you ask these questions of your accountant??

    • +6

      I thought OzBargain is full of accountants, lawyers, financial advisers and life coaches? Maybe I've come to the wrong place.

      • Yeah, OP should just buy an AMG to impressive his colleagues wife

    • -1

      He won't want to discuss over the phone and we are in lockdown….. the car we are looking at has 4-6 months lead time and if we want to go down this path we need to pay deposit now…

      • +4

        I've met my accountant twice in 3 years, all his advice is via email?

        • +1

          Must be the type of accountant who does not want the conversation recorded. He would probably prefer to talk "business" while taking a walk…

      • +6

        Close this thread and open a new one "Recommendations for a good accountant in Sydney?"

      • +1

        He won't want to discuss over the phone and we are in lockdown

        why not?

        Send him your questions and he should answer in writing with specific examples and $$ rates.

        My BIL has a PtyLtd business. He runs a 1 tonne ute and a family car through the business and changes every 6-8 years. The family car gets used for business a lot during the 12 week log book period.

        I've never been able to get my head around the accountant spiel of "change your perfectly good car every 3 years just because you can".

        • Perhaps some of OP's accountant's ideas can only be discussed in person… we know what type ideas they are…

          • @SF3: @SF3 you got it!

          • @SF3: Then do it on zoom or teams or facetime.

            F2F meetings at the office are a dead concept and a waste of time travelling.

  • +4

    I would suggest not buying a car just because it can be an instant write-off.

    You're better claiming tax deductions on your vehicle which is being used for business purposes.
    An apportionment of the cost.

    You're never saving money on an asset you don't actually need just to get a tax writeoff.

    *disclaimer im not a tax accountant and I'm not qualified to give professional advice, just my opinion.

  • +1

    Read this

    Do note that ATO charges FBT at 47%. If you receive the benefit as cash instead you will be taxed only at marginal tax rates.

  • +3

    Don't buy a car for "tax savings" because you only get a saving of the tax rate of 27.5% (I think), think more of it as a "discount". Effectively, instead of paying that 27.5% to the ATO, you pay it towards a car, but you still need to fork out the additional 72.5% of the car price.

    As for your second question, depends how you explain to the ATO. If ATO sees that your business doesn't do enough turnover for a full-time gig, or that its nature doesn't require that many km's to be run on the odometer (e.g. that you require client travel, delivery etc), then it will be harder to justify that there is no personal usage. You can also do a logbook as evidence but as with all things tax-related if you're not sure, check with your accountant on the documentation required to be kept.

    • 27.50% is the company tax rate, is that right? It's nice to save 27.50% but not sure whether that would bite me later when I sell the car? I vaguely remember reading an article saying you need to pay GST or whatever tax when you sell the car?

      • +1

        Yes, 27.5% is the company tax rate, just googled and it's actually 25% for 2021-22 (which would be the relevant one in your case).

        You can claim GST back when you purchase the car, but have to pay GST when you sell it (but since selling price will be lower than purchase price, you would have claimed more GST back then you need to paid).

        • Better off putting it in super and come out with a large pot in retirement.

          But then tax accountants don't tell you that because most people will call them crazy for locking up their money for that long vs having a flashy car.

          • @netjock:

            But then tax accountants don't tell you that because most people will call them crazy for locking up their money for that long vs having a flashy car.

            Some tax accountants tell you to do neither and invest instead (outside super).

            • +3

              @bemybubble: Tax accountants shouldn't actually be telling you to invest in anything because their licence doesn't allow them to give financial advice.

              They can tell you the tax implications of the options you are considering (or can consider).

              • @netjock: They can certainly advise you to invest - nothing prohibiting that.

                As to specifics you need a licence to deal in certain areas (except property).

              • @netjock:

                They can tell you the tax implications of the options you are considering (or can consider).

                Absolutely - the point I was trying to make is that there are better ways to save on tax.

  • +3

    Sounds like terrible advice - your gut instinct is right about the deduction not being worth it and FBT being a huge pain in the arse. A more cynical crow would suggest your accountant is trying to make more work for himself ("Well, now we need to do FBT calculations, here's my adjusted fee").

    As for "how could they know", the process would be

    1. they will press a button and every motor registry vehicle that is registered in a company name will be emailed to them
    2. they press another button and every company on that list that didn't lodge a FBT return will get a letter asking why - those who don't have a good answer get flagged
    3. they press another button everyone on the list (regardless of whether they lodged) will be asked to supply a copy of their logbook - those who don't have one get flagged
    4. depending on how much money the government wants, a human becomes involved and starts reviewing/auditing any company that's been flagged and collects taxes/issues penalties until the right amount of cash has been collected

    They haven't done this very much in the past, but the government deficit has never been the size it is in the past either.

    • Great point, thank you for this. Yes I think the gov is money hungry too, so many handouts. Some people said if you have car under the company you can "hide/claim a lot of costs", any idea what they are?

      • My guess would be just washing their private car and petrol costs through the company, perhaps under a naive belief that if their records were to be checked, they would stand up to scrutiny (they won't - a logbook for FBT purposes is a major pain to get correct, and the mindset of someone hoping to hide things isn't going to do a ton of compliance work to "prove" the extent of their dodgy deductions).

        The reality is for at least a decade more and more people have been having chats at barbecues about how it's free deductions if they put a car in the company and it's worked because

        a. the group of rorters were relatively small
        b. the government didn't need the tax money bad enough to chase them
        c. computer systems weren't sophisticated enough for the data matching so it would be a pain to try and police this

        None of those conditions are true now, so IMHO it's only a matter of time before someone pushes a few buttons.

        • So true though, I don’t want to run the risk, I know if they want to really look into our business model we can’t hide any fuel costs… I just added another question in point 3, what’s your opinion on that one? Appreciate your input so far.

          • @easoweno: You'd have to do what's appropriate to your risk profile.

            I hate debt so I wouldn't (this is a personal belief and thus irrational) but I know someone who was offered a verrrrrry low rate and said "eh, I might as well" and took up the offer even though they could afford to buy it outright. (Their logic is by keeping the big amount of cash they'll be able to get a better return by investing/using that money. But that's their guess, of course)

        • Sidebar: in the earlier part of the decade there was a fairly generous exemption for "utes" to not have FBT because "clearly a ute is not a car and primarily designed for business purposes, sure, etc".

          Then utes became more and more glamorous (sweet sound system, brah) until they creeped across the line of "okay, people are clearly buying these things to drive normally, not to lug cement mixers across building sites".

          The ATO changed the rules and created a clusterscramble of tests for whether utes were reeeeeeeeeally in the spirit of a pure business use asset, so now most of the "utes don't have FBT" concepts no longer apply.

          A lot of people aren't aware of this because updates to tax laws aren't common barbecue topics.

  • +1

    If you will use the car significantly (90/10, 80/20) for your business then go for it. Tip is that you run a logbook for 3 months as evidence of business use for ATO. Otherwise just forget it use your current car and claim actual business usage ( 50+ cents/km) .
    Other ideas for your pre-tax buiness $
    a) Super, 15% tax if you dont have a first home then $15k each per year for 2 years ( $60K) into your super, that you can withdraw when purchasing first home ( super fund first home saving scheme)
    b) Super, better if you are on the wrong side of 50, 15% tax on $27.5K each max per year (with catchup since 2018)
    c) Trust: Distribution to relatives over 18 earning less than $45K even better less than $18K as that is tax free income.

    • a. we already bought a house
      b. done that too
      c. not done, but I thought trust is for something that's at least $1-2 mil worth of assets? Otherwise the running cost of the trust is not worth? The company turn over will be approx. $80k this year.

      • +1

        Just on c) the trust does not have to to be used as holder of assets, it also protects you and yours assets at arms length from any legal issues from risk exposure from business as well as provides a legal mechanism to distribute income to family. Your accountant will know about them, cost is $2-3K year, so well worth it for asset protection and if you can distribute to a number of family members not on high incomes. But if you are just distrubuting to yourself and partner who already have jobs then not much in it. Conversely if you have one relative eg a stay at home uni student then that $18K tax free will be at least a 32% benefit ie $5600 over paying tax on your marginal tax rate.

        • Interesting… Do you mean you can put the company under a family trusts? What happen to the assets/stocks that’s been bought already? Do you need to transfer them and pay tax/fee to put them under the trust?

      • 80k this year, what about moving forward? Is it going to grow? Also you've said turnover is 80k, what's the actual profit there? Are you a 80k turnover with 50% profit or? I turnover $5 mil, but in a low profit industry..

        If your $80k is 80k profit then that's different and advice would also depend on what you and your partners tax rates are for your other jobs.

  • Had a friend do this (he's a financial advisor and uses the car roughly 70/30 for business/personal.

    The current asset writeoffs made it a no brainer. Although make sure you actually need the car.
    Don't do what one of the previous people who went down this path did and buy a car for the sake of writing off profit, thus less tax.

  • +2

    If you find you have more common sense than your accountant, time to change accountants.

  • +1

    I'm sorry - but any accountant that tells you to buy a car for tax purposes is, quite frankly, bordering on negligence…

    Here's a good rule of thumb - Assume you're never going to get a tax deduction for any purchase you make and then ask yourself 'would I still be buying this if not for the tax deduction?' - that's your answer.

  • I looked at this two years ago when buying my new car but between FBT and paying increased premiums for insurance it wasn't worth it.

  • Do you have any young children, if they help you in any way with the business you should be paying them a salary and super.

  • Go back and ask The Accountant.

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