Motor Vehicle Deductions – Misconceptions and How to Claim the Best Tax Deduction?

At Holmans, we are asked almost every day about which entity should own a motor vehicle and how to get the best tax deduction.

To assist with this decision, we have put together some of the common misconceptions and provide some general advice/guidance. Of course, there are exceptions to every rule and you should liaise with Holmans about tax advice specific to your personal circumstances.

Misconception 1 – Buying my vehicle through a business structure will always give me the best tax deduction!

If only it were that simple. There are a few difficult concepts to get your head around here to truly understand whether a vehicle should be purchased in the business. The main points to keep in mind – the cost of the vehicle, actual business use vs private use, the structure running the business, whether you are a Small Business Entity and GST registration status. All these factors play a part in the final decision.

Possibly the most important concept to understand though is that the running a business (or the structure you use) does not instantly create you a tax deduction.

As a sole trader – You are limited to very few options and a really good guide is here.

In companies or trusts – As a guide for companies and trusts, the lower the cost of the vehicle, and provided there is a reasonable business use (greater than 20%) and the business is registered for GST, then our general advice would be to purchase in company/trust. Also, we often recommend buying the car in the business purely for the GST associated benefits, rather than the tax deduction benefits.

Why? Where the car is almost entirely private, the extra compliance costs and complexity can often outweigh any tax benefits obtained by purchasing it in the business. However, if the car is 100% business use (per a logbook), then the only difference of purchasing in the business is the GST benefits.

Any extra benefit from buying a motor vehicle in a company or trust typically only applies where the Statutory Method (ATO allowed calculation where you don’t use a logbook) provides a default business use which is greater than the actual business use per the logbook. This works best where private use is typically high (but not 100%) and the car value is low (under $68,108 before any trade-in is considered).

Where the car costs exceeds $68,108 (Cost limit for depreciation/deduction limits for 2024), then the tax benefits start to unwind. Typically, car purchases greater than $100,000 (before trade-ins) are best held in private names and a logbook maintained.

Holmans can assist guide you through how your actual use compares to a Statutory Method FBT Reimbursement method (fancy term for mandatory private use adjustments in a company/trust), and which car, if there are multiple, should be owned in the business.

Either way, your accountant is going to ask you to keep a logbook, so we can choose the most appropriate method each year.

There are also some rules of thumb to consider on how many cars you can have in a small business entity where they have predominantly private use (i.e. a Contracting Medical Specialist can’t have their car, their spouse’s car and their kid’s car all run through the company).

Misconception 2 – Buying a vehicle in the business will qualify for the immediate assett write-off!

This will depend on the tax year the car is purchased. After 30 June 2023, the maxiumum immediate asset write-off is capped to assets costing less than $20,000 each. Accordingly, most motor vehicles won’t qualify and will instead be depreciated over the useful life (about 25% each year).

If purchased before 30 June 2023 in an eligible business, yes, but only to a maximum claim of $68,108 (Car Cost Depreciation Limit – before any trade-in is considered).

Any purchase price above this is not deductible where it meets the definition of a “car” (designed primarily to carry passengers). That is another discussion, but most cars are designed to carry passengers (see below).

GST claims are also capped to 1/11th of the cap above (GST claim of $6,191) where the purchase price is more than $68,108 (2024 Limit).

There are separate rules for EV Cars which are designed to make them more attractive to purchase for tax purposes. It is best to discuss these exemptions with your accountant.

Misconception 3 – I don’t need to keep a logbook, my vehicle is mainly business (excempt vehicle)!

Unfortunately, only exempt motor vehicles which are also used predominately for business are exempt from maintaining a logbook and still able to claim 100% of the costs.

All other vehicles should maintain a logbook. The good news is that a logbook kept for 12 continuous weeks, can then be used for the next 5 years.

So what does “predominately for business use” mean and besides…. “I thought my car was an exempt vehicle”?

A vehicle is used predominately for business use and exempt from any private use adjustments (i.e. FBT) if all the following conditions are satisfied:

• The vehicle is a panel van, utility (ute) or other commercial vehicle (that is, one not designed principally to carry passengers)
• The employee’s private use of such a vehicle is limited to:
  • travel between home and work
  • travel that is incidental to travel in the course of duties of employment
  • non-work related use that is minor, infrequent and irregular (for example, occasional use of the vehicle to remove domestic rubbish).

In most cases, vehicles are designed to carry passengers and therefore fall over at the first hurdle (i.e. most Dual Cabs). The ATO rules are more confusing than most realise and very annoying.

Even where the vehicle is not designed to carry passengers, if it is used to go up the beach camping it may no longer meet the strict criteria – The ATO’s guide states that private trips should not be more than 200km each, and not more than 1,000 km in total for the year. That is not much private use!

Misconception 4 – The car has the business logo on it, so it is 100% business related!

This is false. It is the actual “use” of the vehicle that determines the business proportion or claim…. Not who owns the vehicle and not what logos the vehicle has on it. See Misconception 3 for more detailed information on the ATO’s definition of “use”.

The good news is the business logo stencils or painting is claimable as advertising.

Misconception 5 – A Lease is better than a Hire Purchase/Loan on the car!

This is typically false but will depend on the individual circumstances. In most cases, buying the car via a hire purchase/loan will provide better deductions for the business (at least initially).

Technically, the claims over 5 years under both a lease or loan would be very similar, with the loan being better in year 1 and 2, about even in year 3, and a lease is than better in years 4 and 5. It is easier to predict business income in the short term, so we normally recommend a loan.

The choice between a lease and hire purchase/loan also depends on the type of vehicle and whether you will change it regularly. The more regularly (less than 2 years), the more likely a lease might apply.

GST is claimed differently under both methods to.

While we are on the topic of finance, Holmans normally recommend that the residual value of the loan is equal to the approximate value of the car at any point in time (the car yard can help you with this). Meaning, if you decided to trade in the car mid-way through the finance, it would be enough to clear the loan. This prevents re-financing and new car purchase issues in the future. Accordingly, we typically recommend minimal residual values (not more than the value of the car at the end of the loan, and preferably $nil) and financed over not more than 5 years (typically based on mix of cashflow and expected life of the vehicle).

Final Word

The ATO frequently target car claims, as taxpayers regularly claim too much, and it is an easy win for them to recover tax (i.e. no logbook kept in the last 5 years). The ATO also compare car ownership records from the various States, plus luxury car tax reporting to identify taxpayers who might not be adjusting for private use (FBT reimbursements), not maintaining a logbook, or claiming their vehicle is exempt when it is not.

All tax returns are required to separately report the motor vehicle claims to, so the ATO can easily compare your claims to industry benchmarks to determine if your claims are unusually high compared to other similar businesses.

Do Holmans believe in claiming the best possible motor vehicle deductions – Absolutely! However, it is about ensuring it suits your specific circumstances and then complying with the necessary requirements for record keeping/private use adjustments each year. Having been through a few of the ATO Audits, trust us, you will feel much more comfortable if you obtain and comply with the correct advice from the outset.

Need assistance and want to know more?
Contact Holmans today;

Holmans Noosa: (07) 5430 7600 or email info@holmans.com.au
Holmans Maroochydore: (07) 5451 6888 or email infohm@holmans.com.au