Claiming Tax Deductions for your Car

In a continuing effort to try and maintain economic stability, the Australian Tax Office (ATO) extended the instant asset write-off scheme until June 30 2023. Their hope is to counteract the residual impacts the pandemic had on businesses.

The effect of additional deductions for businesses and sole traders cannot be minimized. The ATO suggests that companies confer with financial professionals to determine their eligibility.

What is the Instant Asset Write-Off?

The instant asset write-off is a strategy put in place by the government that creates a tax break for small to medium-sized businesses (SMEs) by allowing an immediate tax deduction on new assets. By fast-tracking and simplifying depreciation statutes for new acquisitions, qualifying businesses receive an immediate reduction in taxable income and can enjoy a more straightforward tax return.

The write-off is not always in effect and is in place at the discretion of the ATO. The scheme is generally valuable for spurring new business as companies will be less likely to postpone purchases (like a new delivery van or Ute) and buy now to use the write-off.

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Expansion of the Tax Write-Off

The present instant asset write-off plan is not new, but the ATO expanded the 2020-2021 tax season program so more Australian companies could take advantage of the plan’s benefits. The two main changes for the 2020-21 tax year are:

  • An expanded eligibility that covers businesses with an annual turnover of less than 5 billion that permits deducting the total cost of new eligible depreciating assets
  • Companies that have an aggregated turnover of less than $10 million can deduct the balance of their simplified depreciation pool

Who Is Eligible?

The write-off is available to small and medium-sized Australian businesses such as:

  • Companies
  • Sole Traders
  • Partnerships
  • Trusts

That meet the following criteria:

  • Have a total annual income of less than $5 billion
  • Have a registered ABN
  • Are the owner of the business as employees are not eligible for the instant asset write-off even if they frequently use the vehicle as a part of their job
  • Are actively operating
  • Have asset(s) in use or ready to use between October 6, 2020, and June 30, 2022

Can It Be Used for Vehicles?

Business owners can use the write-off for a variety of equipment used in their place of business. Everything from hammers to printers to company vehicles is part of the write-off as long as the items meet the ATO criteria.

What About a Vehicle that is used for Business?

Working out how your business vehicle fits into the instant asset write-off scheme can be fairly complicated. These basic guidelines will help you, but for specific circumstances, consulting with a financial expert is the best way to learn details specific to your circumstance.

Understanding How to Calculate Payload Capacity

The one-tonne capacity is also known as the payload capacity.

Your vehicle’s payload capacity is the Gross Vehicle Mass (GVM) minus the basic kerb weight.

A vehicle’s basic kerb weight includes the weight of the vehicle with a full tank of fuel and topped off fluids, factory installed options, a jack, and a spare wheel. Goods and passengers are not included in the measurement of basic kerb weight.

  • “GVM – Basic Kerb Weight = Payload Capacity”

Frequently Asked Questions

How Do I Claim My Instant Asset Write-Off on My Taxes?

When you lodge your tax return, simply request to use the instant asset write-off. When you do this, be sure that you have all of the details documented so the filing process is straightforward and you will not need to answer to the ATO later. While getting the services of a financial professional is not required, many business owners feel consulting with an expert puts them in a better position to get the maximum return possible. If you plan to purchase a new vehicle for your business, be sure you are up to speed on the details surrounding instant access write-offs. Taking advantage of your chance to get an extra write off is a smart move and can help your bottom line.

Will I Get the Same Amount Back in My Taxes?

Unfortunately, no. That idea is a common misconception that does not apply because the process is based on the marginal tax rate of the business owner. For Example: Benny is a sole trader who has a business profit of $90,000, which puts him in the tax bracket of 32.5 per cent plus the Medicare levy of 2 per cent. Benny buys a $30,000 Ute that is only for use in the operation of his business. Benny’s purchase meets the criteria of the instant asset write-off. So, the instant asset write-off of $30,000 reduces Benny’s taxable income from $90,000 to $60,000. The amount Benny saves is 34.5 per cent tax on the $30,000 amount spent to purchase the Ute. The amount Benny will get back in his tax return is $10,350 once he files his taxes.

Can the Vehicle I Purchase be a Car, or Must It be a Ute, Heavy Machinery, a Van, or Delivery Vehicle?

The ATO offers some leeway about the vehicle you will write off using the instant asset programme. As long as your vehicle is within the guidelines, a car is an acceptable purchase for the instant asset write-off. However, there are limits, and even though a shiny new Porsche might make your company more enjoyable. It exceeds the ATO limits.

Must My Vehicle Be New, or Can I Use the Instant Asset Write-Off if I Buy a Second-Hand Car?

It may surprise you to learn that second-hand cars that meet qualifications can be a part of the instant-asset write-off. You should verify the car you are wanting to purchase meets the criteria first.

What is the Car Limit?

As it pertains to the instant asset write-off, the car limit restricts the cost of passenger vehicles (cars, Utes, vans, trucks etc.) designed to carry fewer than nine passengers and loads less than one tonne. However, the car limit does not apply to vehicles modified for adaptive use.  For the income year 2020-2021, the car limit is $59,136 (Excluding Goods and Services Tax)

What If I Drive My Car for Personal and Business Purposes?

It is not uncommon for business owners to use vehicles for personal reasons from time to time. If you are dividing the use of your auto, it is necessary to keep records showing how much you drove your car for business purposes and how much for personal reasons. Calculate the percentages of each use to determine how much you can claim as part of the instant asset write-off. For Example: Jay uses his car for his business 75 per cent of the time and the remaining 25 per cent for personal use. The 2020-2021 car limit is $59,136. However, Jay must deduct 25 per cent of the car limit because of the time his auto was driven for personal reasons. That makes the total Jay can claim under the instant asset write-off $44,352.

Can I Write-Off More Than One Car Using the Instant Asset Scheme?

You can write off more than one car using the instant asset write-off scheme. Just keep in mind the ATO’s limits and thresholds. If you are in doubt, consult with a financial expert to ensure you have all of the details correct.

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