One of the most common questions that we receive from our clients is how to structure their motor vehicle purchase within their business for maximal tax benefits and asset protection. Everyone is is looking for a tax deduction for buying a car for business.
As you can imagine, there are a few different ways to do this, and achieving the best result for you, all depends on your personal & business situation.
However, let’s assume that your business trades through a company, where you are the Sole Director. This is often a fairly standard situation.
Now, for the most part, the average business owner usually only considers the tax advantages, however, a small business accountant who is worth their money takes things a little bit further.
I know for a fact that I am one of these accountants and I always approach the purchase of a motor vehicle in the following way and you so should you.
When getting a tax deduction for buying a car for business I focus on the following points.
Ensure that the motor vehicle is protected
This is especially the case if the vehicle has no charge or finance over it. The reason why this is important is because the motor vehicle will often carry significant value and therefore, can come under threat as compensation of a personal for business lawsuit.
Now, as we mentioned above, the business is trading through a company. In this situation, the first question we are usually asked, is whether or not it is ok to purchase the vehicle in the company?
In this scenario, I would most probably advise that the business owner set up a discretionary trust with a Corporate Trustee and purchase all of the business’ assets, which includes the motor vehicle, in that trust.
The reason for this is quite simple – It allows for the business’ assets to be owned outside of the business, hence the company. Therefore, if the company was to be sued for any particular reason, then it would be more difficult for the party trying to sue your company, to get their hands on any of your business assets.
The way we usually structure this arrangement is also quite simple. The Trust would hire the motor vehicle to the trading company through a hire fee.
Tax deductible Asset
Tax deductibility is achieved because the asset is simply a business asset, hence, it is used to further the business’ daily operations.
In the financial year of 2019, if the vehicle is purchased under $25,000, then you may be eligible to deduct it 100% in that year, rather than over an effective life or in a General Pool.
That’s a huge advantage, however, if your vehicle is over that amount, as often is the case, then you will need to allocate to either a Small Business General Pool at 15% for the first year and 30% thereafter, or depreciate it over 8 years at 25% diminished value.
In regards to the ongoing operational and maintenance costs such as fuel and oil, cleaning ect, then usually the trading company in this situation would claim these costs as it is the entity using the vehicle, day-to-day.
However, deductions such as interest on finance, depreciation, registration and insurance are all normally claimed in the entity that owns the vehicle. In our case, that would be the trust.
The company would then pay the Hire fees over to the trust and deduct these costs, while the trust would need to report the hire fees as income. Some of this income would be shielded from tax by the trust’s deduction mentioned above.
I hope that this clarifies a well-structured motor vehicle purchase to ensure that your asset is both protected and achieving tax deductibility.
All the best on your next car purchase.