Tag Archives: car

Car Leasing and vehicle financing

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Your business needs a vehicle, and you do not have the spare cash to buy it outright. What options do you have? This guide will look at the options for car leasing.

WHY do you need a Car Lease?

Your vehicle represents your business and your key means of earning revenue. Unfortunately, few businesses have enough cash to buy a vehicle outright, so financing must be sought.

WHAT are my vehicle financing options?

Business loan – a financial institution lends you the purchase price. If your business is brand new, you will likely need to provide personal guarantees.

Credit Card – high interest and reduces your credit limit

Car Lease – essentially, you rent the car for a period with the option to buy at the end. Great for freeing up money that can be spent on other things

Hire Purchase – similar to lease, but the business owns the asset after the last payment is made

Chattel Mortgage – business car loan where the vehicle is security for the loan

Car Subscription Service –the car is provided for a fixed weekly fee with the option to swap or stop the subscription with short notice.

Long-Term Rental – fixed cost for a fixed term and may or may not include insurance, fuel, and maintenance.

HOW do I decide if car leasing is right for my business?

Leasing is suitable if a new vehicle is required every 3-5 years. Remember, a newer car will be more reliable and give a good impression of your small business. Some leases may have a balloon payment at the end of the lease, or you have the option to buy outright.

A car lease does not necessarily have to be a direct cost to the business. A small business owner may allow employees to salary package a novated lease.

 Put simply, a novated lease is a car finance package that allows your employer to make lease payments for you from your pre-tax income for the term of a lease whilst you are still employed. This has the effect of reducing your taxable income, which in turn, reduces your income tax. 

Most often, a lease will include running costs such as registration and servicing. The employee will be liable for Fringe Benefits Tax (FBT), which is based on a forecast that uses the value of the car and the distance of your business travel vs personal use to determine an amount.

If the business takes out the lease, there are two options, a Finance Lease or Operating Lease. With a finance lease, the vehicle is bought by a finance company and rented out to the lessee over a lease period. At the end of this period, the lessee must either purchase the car from the finance company by paying the residual value or lease the vehicle again. Operating leases are like a finance lease, except the lessee is not responsible for the residual value at the end of the lease – the car is handed back to the finance company. Some businesses with a high turnover of vehicles use operating leases to reduce administration costs. Operating leases can include all charges for a fixed monthly payment.

Your accountant can help you understand the costs of buying vs leasing.

HINT

For a business, depending on the circumstances of use and current legislation, lease payments are tax-deductible. The car leasing advantage is a more predictable cash flow. This vehicle financing method should not significantly affect the small business’s borrowing power for other purposes. The lender may claim the GST on the car’s purchase price if you are eligible. Only the vehicle’s price, exclusive of GST, is financed, lowering monthly payments.

When deciding, do not take the first deal offered to you. Different companies will offer different prices. Make sure the leasing company is reputable, and last but not least, be realistic about how much you can afford each month.

SUMMARY – compare companies for car leasing

Car leasing is a cost-effective way to get your business mobile without borrowing money. Ensure your business or individual can support the payments and that you compare leasing companies to get the best deal.

Car Expenses

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Work-related car expenses are among the simplest business expenses that can be claimed against your tax bill, thus saving you money. However, claiming does require some discipline. There are different methods like the ATO cents per km and logbook methods to choose from.  This guide will help you decide which car expense deduction method is right for your small business.

A car expense is a cost associated with the running of a car and can include fuel, tyres, servicing, repairs, insurance, tolls, parking, registration, hiring, interest on vehicle loans, lease payments and depreciation. A work-related expense is one that is incurred whilst performing your job.

WHY should I bother?

To claim a motor vehicle expense, you must be able to provide the Australian Tax Office (ATO) a sound justification for the kilometres that you travelled for work purposes. Unfortunately, just because you have a work vehicle that may even advertise your services on the side, it does not mean you can claim 100% of its costs.  The ATO is looking to understand how much you used this vehicle for business purposes versus private usage. So, unfortunately, the trip down to the beach in the ute is unlikely to be a tax deduction.

When you add up the costs of owning and running a vehicle, these costs can run up to hundreds of dollars a week. Over a year, that is thousands of dollars.  If some of this can be claimed, it is much better in your pocket.

WHAT can I claim as car expenses?

Claimable work travel includes:
  • Travel between work locations
  • Travel to a customer
  • Travel to pick up work equipment or supplies
  • Travel to work-related conferences and training courses

Travel from your home to work is not a tax deduction. This includes travel where you may do minor work-related tasks such as collecting mail. Travel from home to work can be claimed where:

  • You are a home-based business, so any business travel can be claimed such as visiting the bank or accountant.
  • You need to transport bulky items to and from their usual place of work where there is no reasonably secure storage provided on-site. For example, a tradie van or ute contains the tools of the trade.
  • You need to travel to a different location for business purposes, such as a customer meeting before or after work.
  • You are on-call, and thus your work has commenced before you leave your home. This would include emergency services, medical staff and after hour repair technicians.

HOW do I claim car expenses?

There are three ATO methods to claim motor vehicle expenses:

1. Cents per km method
2. Logbook method
3. Actual cost method

You may only use one method per year per vehicle.

If you are a Sole Trader or Partnership, you can choose between cents per km or the logbook method. However, if you own a motorcycle or a vehicle designed to carry either greater than one tonne or nine or more passengers, you must use the actual cost method. Thus, if you are a tradie with a one-tonne, ute you must keep actual records all year long.

If you are a Company or Trust, you also must use the actual costs method.

Cents per kilometre method

Every year you can claim up to 5000 kilometres per car based on a cents per kilometre deduction. For the 20/21 tax year, this rate is $0.72 per km. You must provide electronic or written evidence such as a diary to substantiate your kilometres travelled. We suggest you record the date, starting and ending kilometres and reason for travel. If you made a business trip in the 20/21 tax year of 32km, you could claim 32 x $0.72=$23.04.

Logbook method

The logbook method is a means to calculate the percentage of business travel versus private travel. It requires you to keep an electronic or written logbook per car for a single 12-week period within the taxation year.

As a separate exercise, you must record all your car-related expenses for that income year such as fuel and servicing expenses. Although we don’t recommend it, costs can be estimated based on odometer readings.

If over the 12 weeks you travelled 10,000 k kilometres and 6,000 were for business, then your business usage would be 60% (6,000/10,000). If your car expenses, including depreciation, were $9,000 for the income year, you could claim $5,400 ($9,000 x 60%).

The ATO states your logbook must include:

  • when the logbook period starts and ends
  • the vehicles odometer readings at the beginning and end of the logbook period
  • the distance the car travelled during the logbook period
  • kilometres travelled for each journey. If you make multiple journeys on the same day, you can record them as a single journey
    • reason for the trip (business reason or private use)
    • date of the journey
    • odometer readings at the beginning and end of the trip
  • the odometer readings at the start and end of each subsequent income year your logbook is valid for
  • the business-use percentage for the logbook period
  • the brand, model, engine capacity and rego of the car.
Actual cost method

The actual cost method requires you to keep track of every journey and every cost for that vehicle whilst it is owned by the business. As part of this process, you must keep the same sort of records as per the logbook method, but for 52 weeks or the time you have owned the vehicle. The costs for the year, including depreciation, can then multiply by your actual business use percentage to work out the deduction you can claim.

If you provide a vehicle to an employee or a spouse, tax implications are best discussed with a tax accountant.

HINTS

At the time of writing, the government provides a tax incentive to write a car off in the current financial year via temporary full expensing.

If your employee uses their own car for your business, your business can claim a deduction for any motor vehicle allowances or reimbursements you pay them for their costs, such as the cost of fuel.

There are various smartphone applications available to help you keep track of vehicle expenses, just search car logbook apps in your app store.  Some of these will use GPS tracking to make your input easier. The ATO also provides a handy app to keep track of vehicle trips and other business expenses and income.

If using the logbook method best not to include your 4-week driving holiday as part of the 12 week calculation period.

Information on buying vs leasing can be found here.

A guide to buying a van can be found here.

SUMMARY – work-related car expenses

Business use of a vehicle is tax-deductible.  There are three methods to claim a deduction; the choice depends on your business structure and the type of vehicle you use. Accurate record-keeping is important and will make your life so much easier come tax return time. If in doubt about anything discussed in this guide, we recommend you contact your accountant or seek clarification from the ATO