A common question we’re asked by our medical clients relates to the tax implications of a new car purchase. While the purchase of a car seems like a simple process, there are a number of different factors to consider.
The below article considers the tax implications of owning a car. The Australian Taxation Office (ATO) defines a car as a motor vehicle designed to carry a load less than one tonne and fewer than 9 passengers. If the vehicle does not meet the above definition (for example it carries a load of more than one tonne), different rules may apply. For this article, we are referring to the definition of a car that has a loan of less than one tonne and fewer than 9 passengers.
There are two main options to consider when purchasing a car:
Purchasing the car outright: This involves a large upfront cash payment. This is the cheapest option over the life of the car as there is no need to pay interest charges as you would with a loan.
A loan for purchase: A loan spreads the cash flow (of payments) over a pre-determined period. However, you will end up paying more for the car as you will have to pay interest on the loan. A loan can be arranged through your bank, a finance broker or the car dealership. If you claim a deduction for your car using the logbook method (refer below), the business-related percentage of the interest paid is a tax deduction to you. For example, if you use your car 40% for business-related driving, then 40% of the interest on the loan is deductible.
Another consideration for those that salary package, is to take out a novated lease for the purchase of a car. This may be of interest to those that work in the public hospital system.
Claiming Motor Vehicle Expenses on Your Return
You can choose to use either the logbook method or cents per kilometre method to claim a deduction for motor vehicle expenses in your tax return. You can choose the method which produces the better deduction each financial year, and can switch between the methods over the period the car is owned.
Logbook method: A logbook is kept for a continuous period of 12 weeks and all journeys (both business and private) must be recorded in the logbook. At the end of the 12 weeks, you calculate the percentage of total kilometres the car was used for business purposes. Expenses incurred are claimed in your tax return at the percentage business use calculated in the logbook. For example, if 20% of car usage was business-related, and yearly expenses totalled $3,500, a deduction of $700 ($3,500 x 20%) could be claimed in your tax return. The ATO requires a new logbook to be kept every 5 years, or if there is a significant change to the business use of the car. The logbook method is a lot more onerous for record keeping requirements, as you need to record all trips for 12 weeks, as well as keep a record of all running costs to meet ATO substantiation requirements.
Cents per kilometre method: For every kilometre up to 5,000 kilometres travelled for business purposes, an amount set by the ATO can be claimed as a deduction in your tax return. For the 2021/22 financial year, the ATO amount is $0.72. The ATO amount is designed to be inclusive of all ownership costs (depreciation, interest, fuel, insurance, maintenance etc). For example, if you travelled 1,000 kilometres for business purposes, a deduction of $720 (1,000km x $0.72) could be claimed in your tax return. A travel diary should be kept to substantiate business trips taken. GPS records such as Google Maps can also be used to substantiate the length of the trip.
Under both of the above methods, business trips specifically exclude trips made between home and your usual place of work. However, trips made to other clinics, training, medical conferences, or any other trips for work away from your usual workplace would be considered a business trip.
Usually if you do not have a high business use of your car, it’s preferable to claim a deduction using the cents per kilometre method as it’s less time consuming to track, however if you think you will exceed 5,000 business kilometres per financial year, the logbook method would be more beneficial.
If you use the logbook method to calculate deductions, part of the deduction in your tax return will be for depreciation on the car. Depreciation recognises the benefit the cost of the car provides over time.
If the only income you receive is a salary, the cost of the car is depreciated over a period of 8 years, or 25%. The depreciation claim is apportioned in the first year based on the purchase date of the car.
What if you were running your own business? Medicos running a business under an ABN are able to claim a deduction for a new car using the expanded small business depreciation methods as follows:
|Depreciation incentive||Date of purchase||Cost limit|
|Instant asset write off||2 April 2019 to 11 March 2020||$30,000. Cars costing more than the limit up to the luxury car limit can be added to a general depreciation pool.|
|Instant asset write off||12 March 2020 to 5 October 2020||$150,000|
|Temporary full expensing||6 October 2020 to 30 June 2022||No limit|
In both scenarios above (employee or business), the luxury car limit for depreciation purposes is $60,733 for the 2022 financial year. This is the maximum amount of depreciation you can claim for a car. If the cost of the car is above this amount, the excess is not depreciable and not deductible. Additionally, depreciation is limited to the business use of the car. For example, if a car is purchased on 1 July 2021 for $62,000 and is used 70% for business purposes, the depreciation deduction would be calculated as follows:
- Employee: a deduction of $10,628 may be claimed in the 2022 income tax return, which is calculated as $60,733 x 365/365 x 25% x 70%.
- Business: a deduction of $42,513 may be claimed in the 2022 income tax return, being the car limit of $60,733 x 70%.
Goods & Services Tax (GST)
Medicos running a business under an ABN are able to claim GST for the business-related car expenses in their Business Activity Statement (BAS). A GST credit can also be claimed in the quarter you purchase the car.
If you choose to use the cents per kilometre method to claim expenses, there is a specific formula the ATO allows taxpayers to use to calculate the GST which is claimable on the purchase of the car.
Fringe Benefits Tax (FBT)
A liability for FBT may arise following the purchase of a car if you use an entity (a company or trust) to run your medical business.
If a car is available for private use by an employee or their associates (which includes a spouse), a calculation of the taxable value of the benefit is required. The ATO deems the car to be available for private use if the car is garaged at or near the employee’s home (even if only for security purposes), or if the employee is in possession of the car keys. There are multiple methods which can be used to calculate the taxable benefit of a car and it’s best to discuss your options with an accountant.
Disposal of a Car
Disposal of a car can come in many forms – selling, trading in or being written off in an insurance claim. When the car is disposed of, you need to calculate a balancing adjustment, which recognises the difference between the disposal value and the written down value of the car (ie the cost of the car which has not yet been claimed as depreciation). There is a special formula to use to calculate the balancing adjustment if the original cost of the car was above the luxury car limit.
Additionally, if you are operating a business under an ABN, GST will be payable when you dispose of the car. There may also be a balancing adjustment required for GST if you stop using the car for business-related purposes within a certain period of time.
If you have questions regarding the tax implications of purchasing or selling a car, please contact Angela Stavropoulos from Pilot’s medical services division on email@example.com or (07) 3023 1300.