Tax Write off - Motor vehicle - value greater than business income but less than PAYE tax

tax advice (that I know isn't advice)

I recently legitimised my "hobby" into a (very) small business as a sole trader with an ABN. It will only earn $5k-$10k in revenue this FY.
I use my vehicle 100% for business use (I use my GFs car for personal trips).
I need a vehicle more suited to the business (eg: a ute or wagon).
I have multiple income sources for the 2021/22 tax year (PAYE earnings, dividend income).
This year's tax bill will be circa $50k as I finish FT employment in January and the payout includes 6 months LSL, 2 months AL and some other owed monies..

If I was to buy a ute (say $50k) for the business can I utilise the small business instant tax write off and reduce my total tax bill by offsetting against other income?

Some articles I've read imply this is possible. To me it seems a bit dodgy but if I could do it I would.

Comments

  • +4

    There's red flags, then there's "I bought a $50k ute for a small business that makes $5-10k a year" red flags. ATO would be on you in a flash for that 100% commercial use of the vehicle, it's highly doubtful.

    You don't get to decide when you legitimise your hobby, there are tests to support it. One is that your business has over $20k in revenue.

    Go read about non-commercial losses requirements, then go talk to an accountant, because it sounds like you need a lot of help.

    • You don't get to decide when you legitimise your hobby,

      True. I didn't get to decide when to "legitimise" my hobby.
      It was forced on me as the people I deal with could only deal with ABN holders during lockdown. I had to get an ABN. Even before that, everything I did was within the ATO guidelines. I just call it a hobby because I enjoy it more than my job.

      • Getting an ABN doesn't change it in the eyes of the ATO either. Anyone can get an ABN, there are no restrictions on doing so, but that doesn't mean you're operating a business instead of a hobby when it comes to claiming business losses against other income.

        As I said, go read about non-commercial losses requirements and have a chat to an accountant, but it's not going to be possible to claim it this year.

    • Where is the 20k rule, from the first search result of google research I have done.

      If
      You intend to make a profit – or genuinely believe you will make a profit from the activity – even if you are unlikely to do so in the short term.
      then
      your a business.

      https://business.gov.au/planning/new-businesses/difference-b...

      • As I said above, non-commercial losses requirements. You can call yourself a business, sure. But if you want to claim losses there are rules.

        • It might only be a “loss” because of the instant write off. In normal times his business might break even or make a small profit because he would only be claiming depreciation and running expenses on the car (especially if he made closer to $10k).

          OP - freefall is right = if its a clever scheme to buy a car with the instant write-off provisions and then “close” the business next year, then tread very cautiously. If you are honestly pursuing a small business to earn income and you need the ute for it (which is fine), then you can talk to the ATO and request a private ruling. If they say its not a business, then at least you don’t have to declare the $5-10k as income. If you want to read about the fine line between hobbies and businesses, google Joanna Stone / javelin thrower / ATO …

          Also, keep in mind that if this hobby / business has been operating in prior years and nothing has changed except you registering an ABN, but you now want to claim the losses, the ATO may well want to know about income earned in previous years that you didn’t declare.

          • @gr70: No, it's not a clever scheme.

            I'm transitioning from FT employment to semi-retirement and ramping up the "hobby" and have also been asked to install fleet management trackers in vehicles throughout Greater Sydney (it's amazing what people start offering when they hear you are finishing corporate life) and I'm resurrecting my original trade and starting to do brakes and suspension work again and also starting a handyman business in my local area where they are happy to pay $60/hour.

            I'm up front about my hobby income. I even have YouTube videos of what dollars it pulls in.

            The material input is free and currently I drive past about 70% of what I can make money on because I can't transport it.

            Bemybubble below has pointed me in the right direction for reference material and the legalities are much clearer.

            • @brad1-8tsi: All the best - sounds like you’ll be making a lot more than $20k in no time. Probably worth getting advice to structure it properly (sole trader vs company etc). Doing brakes and things I would imagine you need to get some sort of liability insurance, maybe register with some bureaucracy, pay workcover etc - unless you know it already from your work, a small business accountant should be able to help on tax and at least point you in the right direction for regulatory stuff. Anyway, sounds like a great retirement plan … good luck and enjoy.

  • +2

    This is similar to using a hobby farm to write off your holiday house.
    The ATO will assume you are buying the Ute for the tax saving, audit you, refuse the deduction, and you will have a Ute and a tax bill. You will then have the option to go to court and prove the hobby is a legitimate business and it made commercial sense to buy a Ute for it. That will be hard.

  • +1

    What if op has all the log books to prove time and kms. I’d still go with caution and do 60% at most

    • +1

      I couldn't imagine any business that does $5-10k sales would rack up more than 1000km of driving a year, unless it's home delivery of individual packs of ramen noodles.

      At which point, it's buying a $50k ute to sit there and do nothing because it saves $15k of tax.

      • +1

        Tax losses carry over to next FY doesn’t it?

        • The goal is to claim the tax loss from the business this year, you can't get a 100% refund on the ute, you just get a tax deduction. With current tax rates, that would work out about $15-20k on a $50k ute so they're still $30k out of pocket for a vehicle that mostly sits there.

          Maybe business will pick up 50 fold next financial year and the ute will be worthwhile, but seems unlikely.

          • @freefall101:

            you can't get a 100% refund on the ute, you just get a tax deduction.

            I'm fully aware that spending $30k only gets me $10k back at my current marginal rate. I never suggested that it would be a tax rebate.

            The business won't pick up 50-fold because that would be $250k-$500k revenue and I have no interest in going that big.

      • 20km a week. lol

        I was doing 150km/week sticking within my LGA/5km radius. One of the businesses offering me sub-contract work wants me to travel all over over Greater Sydney.

        • You plan to earn $5-10k while driving 150km a week?

          You need to find a new business idea, your current plan sucks.

          • @freefall101: @freefall101

            Have you ever started and grown a business? Was it profitable in the first 6 months?

            Do you have one now?

            Are you generally pessimistic and risk averse?

            Do you take advantage of all the tax deductions legally available to you?

            • @brad1-8tsi: I’m saying the numbers don’t add up, but it’s not my concern. I’m an accountant, I’ve seen more small businesses fail than you could imagine because the numbers don’t even remotely add up though.

              If you’re truly going to use this 100% for work purposes the you can carry forward the loss, you can’t legally claim it this year. But expect to raise a lot of red flags on claiming 100% business use and keep a very good log book.

    • I've got the logbooks to prove 100% business use. The ATO app only asks for kms driven and date. Time not required.

      At the moment I do around 150km weekly in pickups, sales and attending my storage/workshop. If I need to do shopping I take the other car. It's really wasn't that difficult to only do business kms when lockdown was on and you couldn't go anywhere.

      • Whats the ato app btw

        • https://www.ato.gov.au/general/online-services/ato-app/

          List all your expenditure and apportion business use. Photo record of receipts. I find it handy for all those small receipts that you forget to put in the tax folder

          Record vehicle usage using either km start/finish, GPS tracking (and another I can't remember)

          Record income events.

          Works quite well for simple stuff like I have

  • lol…

  • +1

    Tried this for uber eats, made 10k, car cost was 20, could only claim depreciation or get rekt by tax audit

    • Why, the vehicle has 7 years useful uber life, so you will see 70k over 7 years, from the 20k investment. Seems perfectly legit. Would the ATO prefer you carry people in a wheelbarrow from bunnings?

      • +2

        Yes because wheelbarrows are much less effective at reducing how much tax you pay.

    • You should change your accountant

  • +1

    Plenty of fools over capitalise. As long as you can prove that the purchase is not for private use where is the problem?

  • You’ll more than likely get caught out by the non commercial loss rules. I suggest you read up on those as you will be forced to carry forward a loss from business to future years…

    • Thanks. That pretty much answers my question.

      • Btw what Ute were you looking to buy?

        • Probably a Triton if it's a ute.

          • @brad1-8tsi: It’s worth noting that most utes (generally 1 tonners) are not defined as a motor vehicle under tax law.

            Not a motor vehicle means no requirement for a log book and no depreciation limit :)

            Pretty sure a triton fits the bill but haven’t checked in a little while

            • +1

              @bemybubble: It's becoming obvious that I need to find a decent accountant in my local area.

              I've been doing my own tax for PAYE and shares for a long time and understand what the rules are.

              Going forward it will be shares + superannuation income stream + whatever other work I feel inclined to do and that obviously needs some advice until I get my head around the rules.

    • So while I satisfy the 4 criteria and am carrying out a business, I also need to have that business earn more than $20k in one year. Before that they are deferred losses unless I can get a commissioners ruling (unlikely).

      • Or profitable 3 of 5 years is another.

        And yes. Commissioners ruling aren’t M n Ms unfortunately

  • Yes you can do it 90% of the people in ozbargain is scared of everything. I did instant asset write of claim from my ABN business that I make around 15k a year. Did 30k car write off and got 15k tax refund from my Full time job. And my accountant said when you sell the car it will be considered as your income. And you call also claim yearly depreciation petrol, tolls, rego etc.. Ping me if you need any further information.

  • You will be able to write it off instantly but I don't know if you will be able to offset your income.

    There are a few boxes you need to tick for this to be a viable option.

    Due to you getting your LSL and annual leave paid out you might not be able to satisfy the income requirement without the commissioners discretion.

    https://www.ato.gov.au/business/non-commercial-losses/the-in...

    if you do pass the income requirement, you need to pass one of the four tests as well, which I think you might have some troubles with.

    https://www.ato.gov.au/business/non-commercial-losses/four-t...

    • You don't pass the assessable income test with 5-10k
    • your business is new so it does not pass the profits test.
    • I am assuming you do not pass the real property test of the business having $500k in real property.
    • your only option is other assets which seems unlikely too with a minimum other assets of $100k.

    In this situation, if you want to do this you might need to apply for Commissioners discretion.

    https://www.ato.gov.au/Business/Non-commercial-losses/In-det...

    I have never applied for one before but I imagine you will need a solid reason to get it.

    If you plan to fully commit to working this business have you considered structing it differently? for example have it run through a discretionary trust. It could allow a lot more flexibility especially if you get a Family Trust Election for it, but see your accountant for something like this.

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