Australia's response to Covid-19 came in a variety of ways. One of these allows you to claim the cost of your new car against your tax. To take it a step further, you get to benefit immediately. The only caveat is that the car must be used for business purposes. This is where you learn about the instant asset write-off scheme.
What Is the Instant asset Write-off Scheme?
Once your business has an annual turnover that is below $500 million, you can claim immediate deductions for amounts of $150,000. In January 2021, the government plans to reduce it to $1,000. A claim can be made for new or used asset or equipment purchases. That means you can redeem it for buying a car, some office equipment, or some tools that you needed, once your business falls into the income bracket. Before you can claim in a year, your business needs to use the asset.
So, this is good news, right? There's no denying that it's very cost-effective, but it's time to understand things better to help you make the right choice. You can only claim if the asset's purchase date falls in the correct period. Additionally, your claim depends on the applicable threshold to your business and your GST status. If you're unsure of what that looks like, the website of the Australian Taxation Office (ATO) has all the information.
What Does the Process Look Like?
Here's an example to help you understand how you can take advantage of this before it's too late. Imagine you have a small business that makes about $500,000. To avoid complicating this, imagine that amount is what your business earned for the past 5 years. Now, your old car is beaten up, and you wonder what amount of time it has left in the world. Buying a car is the best option. What if you didn't need to use a car loan to buy it, though?
When the financial year ends, you are able to claim a tax deduction, because of wear and tear on the vehicle over its useful life. What if you could use that depreciation figure to offset the purchase price of the new vehicle? With the instant asset write off, the deduction can be counted as a deduction the next time you lodge a tax return. It's as if your taxable income falls.
The best part is that you are able to claim the deduction at once. Before you start jumping for joy about the income tax deduction, the vehicle must cost less than $150,000. As far as a business vehicle goes, the purchase options at that price point may not overly pique your interest. Still, the vehicle can pay for itself. That's where the real value sticks out.
If your business is not registered with the ATO for GST, get it done as soon as possible. For starters, costs get reduced since you can get rid of 10 per cent of the GST (purchase price). If your small business is registered for GST, the cost of the asset is calculated at the GST-exclusive rate. Companies not registered for GST, however, cannot claim the GST-exclusive rate. Instead, they must use the GST-inclusive price in their write up.
The company doesn't only get this benefit for new vehicles. If businesses are in the market for used cars, the system still works. Of course, it must be for business use, but it should also be lightly used. Remember that this tax benefit is based on depreciation. If small businesses started buying heavily used cars, how would they factor in the running costs associated with depreciation? The vehicle would become hard to value at that point. It values less, of course. Who determines how much less?
Once the financial year is done, it's time to wrap things up with your tax agent. Small businesses aren't the only ones that have to make sure they do this. The companies provide a true reflection of income and deductions, which are submitted with a tax return. When you go through this, you also need to confirm your instant tax write-off eligibility.
Once you are eligible, you can include the cost of the car as a deduction for that tax year. If you don't qualify for the tax write-off, you may be able to use the car to claim depreciation over the useful life of the vehicle. Note that the two cost-saving measures can't be combined.
Eligibility
An employer may wonder what may make his company not eligible for the tax benefit and compare it to another one that is eligible. The requirements for the tax deduction sometimes get a bit confusing. Apart from the conditions discussed above, the company that earns less than the threshold can't be a sub-company of one that earns above it.
For example, the threshold is currently for businesses that turnover less than $500 million. If your business does turnover less than that but is part of a parent business that turns over more, you can't write up a claim.
Always check your eligibility with a finance professional who understands tax laws well before you attempt to buy and drive away with new vehicles for your business. Apart from helping you understand the tax deduction and its value better, the person can tell you if you're making a mistake.
While the figures are new, these rules have existed for years, and they are no easier to understand now. Before you commit to the car, just let the tax professional look things over.
Separation of Costs
If your small business has an asset, such as a car, you may sometimes use it for personal reasons. It's not like it spikes your operating costs to do so. However, the ATO only cares for business purposes of vehicles. You cannot make a full GST-inclusive or GST-exclusive deduction if you do anything personal with the asset.
Instead, the tax benefit is based on when you are using the car for business purposes. If 10% of your usage is personal, you can only claim 90% of the benefit.
Car Purchase Exceeding the Limit
If the car exceeds the $150,000 bar, you can still do your tax write up, but there is one small difference. You have to put the car into your asset pool, after which you can make gradual depreciation claims yearly.
Addressing Partnerships
There's no denying that this tax benefit can also help with making running costs more manageable for a small business. However, some of these businesses might want to take advantage of the system when more than one proprietor is involved. However, the ATO views the company as the owner of the car.
In other words, if a partnership business owns a car, each partner cannot claim the tax deduction separately to get double the benefit.
Note also that the car must be in the business' name. Therefore, if partners purchase a car in their own name, the benefit is not applicable unless that partner has a registered business.
Conclusion
Purchasing a car could be important for several reasons. However, the most tax-effective method of doing it is through your small business. You can capitalise on the instant asset write-off, assuming you meet the eligibility requirements to do so. While you might want to buy the car and get it over with, it's not always that easy. Get a tax professional or speak to one of westsides professionals to evaluate your situation, so you can confirm your eligibility.
