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Updated Jul 2022 •
Published Oct 2024
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By: James Massie-Taylor, Stephanie Sims, Stephanie Toutountzis
The use of an Australian Business Number (ABN) when purchasing a car has become common practice.
If you've been considering doing this for your next vehicle purchase, there are some important things to considered from a tax perspective.
You should also give consideration to what happens beyond the initial purchase of the car, including incidental costs such as registration, insurance, maintenance and repairs.
All of the following factors should be considered by companies, sole traders and those with part-time, home-based businesses.
Business v Private: how will your vehicle be used?
One of the benefits of buying a car in your business is the ability to claim tax deductions.
The use of an ABN when purchasing a car infers that the car will be used, at least in part, for business purposes.
Where this is the case, the determination of ‘business use’ versus ‘personal use’ is key as this will dictate the portion of expenses and GST credits that could be claimed from a business perspective for sole traders. Logbooks and odometer readings should be maintained as a record of the business use percentage.
When using the vehicle for business purposes, it’s important to note that travel between home and work is not considered to be business travel but rather is private travel. However, there is an exception to this rule where your home is your primary workplace and you need to travel to another workplace during the day.
On the other hand, for companies, all vehicle expenditure can be claimed as a business deduction, noting any portion that relates to private use by employees will be captured by the Fringe Benefits Tax (FBT) rules which are discussed in more detail below.
In addition, both companies and sole traders may be able to access an immediate deduction under the Instant Asset Write Off or Temporary Full Expensing incentives which are due to end on 30 June 2023. The amount of available deduction will depend on whether the cost of the vehicle exceeds the Luxury Car Tax limit or not.
Fringe Benefits Tax
As previously mentioned, where an employer owns or leases a car (new or used) which is available to an employee for private use, this is considered a car fringe benefit and the employer may be liable to pay FBT.
A car fringe benefit arises on any day when a car which is owned or leased by an employer (or an associate of the employer) is used privately by an employee or made available to an employee for private use. It is noteworthy that a car will be deemed to be available for private use of an employee on any day where:
the car is garaged at or near the employee’s residence; or
the car is not on the employer’s business premises, and the employee either has entitlement to use the car for private purposes or has control of the car outside working hours.
Where the above applies and FBT may be payable, the taxable value is calculated using one of two available methods, the Statutory method (calculated with reference to the car’s purchase price/’base value’) or the Operating Cost method (which is calculated by applying a private use percentage of the car’s operating costs, including interest or depreciation depending on whether the car is leased or owned).
Where an employee makes a contribution from their after-tax salary to the employer for the provision of a car benefit, or to a third party for running costs (such as fuel expenses), the taxable value can be reduced by this amount.
Employers can also consider the type of vehicle that is purchased and provide by employees. The FBT legislation outlines the specific criteria the vehicle must meet in order to be considered a ‘commercial vehicle’ for the purposes of FBT. Broadly a commercial vehicle is a taxi or a panel van, ute or other commercial vehicle that is not designed principally to carry passengers. For more information about how to work out if a vehicle is a commercial vehicle or not, see the ‘exempt motor vehicles’ section on the Australian Taxation Office’s website.
Where the private use of commercial vehicle is limited to:
travel between home and work;
travel that is incidental to travel undertaken in the course of employment (i.e. business travel); and
non-work-related travel that is minor, infrequent and irregular
the vehicle will be considered an exempt fringe benefit. Choosing to purchase a commercial vehicle over a car could significantly reduce a business’s FBT liability, to the extent that the exemption criteria can be met.
GST considerations
Where a vehicle is used solely for business use and the owner (whether that be a sole trader or a company) is registered for GST, a credit for the GST included in the purchase price of the vehicle is generally able to be claimed. There may be a limit on this claim depending on whether the purchase is for a luxury vehicle or second-hand vehicle.
Where the vehicle is used for both business and private purposes, the GST credit available will be based on the business use percentage.
If the vehicle is second-hand and purchased privately from a person that is not registered for GST then no GST would be included in the purchase price and so no GST can be claimed by the purchaser.
Where the vehicle is second-hand and purchased from a dealer, GST will be included in the purchase price and claimable if the purchaser is registered for GST.
Financing or buying the car outright
Having the cash to purchase the vehicle outright for the business may be an attractive option in times when interest rates are high.
However, there are a number of reasons to also consider a loan to purchase the vehicle.
When using an ABN to obtain finance, it’s likely that the lender will ask for financial accounts and tax returns from the sole trader or company to substantiate the borrower’s ability to repay the finance.
As a result, it’s important to have these matters and all appropriate documentation in order prior to applying for finance.
In terms of financing options, the alternatives are pretty clear – do you choose a fixed or variable interest rate loan? The pros and cons of each will largely depend on the business’s circumstances.
A fixed rate loan will lock the rate in for a specified period providing certainty over repayment amounts. Whereas a variable loan will move with the market, meaning it can be more difficult to budget for the repayments.
Before you make any decision to purchase, whether as a sole trader or a business, it’s important to have thought through all the tax and other impacts. It will not only help inform the type of vehicle purchased but can potentially save you money in the long term over the life of the vehicle.
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