Tax effectiveness of car options

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From: Mandy L


I've been doing some research on the most tax effective way to own or lease cars. What I have found so far indicates that leasing a car to yourself through your own company is most effective. What I am still wanting to find out is
- whether this varies depending on who owns the company
- whether including rego, insurance, petrol, servicing, washing etc change the situation as opposed to just doing this with the cost or lease price of the car

What are your thoughts? And has anyone been through this decision recently? I will be talking to my accountant next week but want to research this properly first.

Mandy
 
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Reply: 1
From: Rolf Latham


Hi Mandy

I have heard that with recent depreciation changes its "financially" best if you buy the thing outright and depreciate it.

This is of course subject to having the cash to do that.

Ta

Rolf
 
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Reply: 2
From: Dale Gatherum-Goss


Hi Mandy


>I've been doing some research
>on the most tax effective way
>to own or lease cars. What I
>have found so far indicates
>that leasing a car to yourself
>through your own company is
>most effective. What I am
>still wanting to find out is
>- whether this varies
>depending on who owns the
>company
>- whether including rego,
>insurance, petrol, servicing,
>washing etc change the
>situation as opposed to just
>doing this with the cost or
>lease price of the car


There is rarely, if ever, one best way to go about all this and so many different factors that you will need to consider.

Yes, the running expenses of a car, any car, through a company or trust is 100% tax deductible. And, Rolf is right in that the new depreciation rules under the STS does add an advantage in the short term.

However, this strategy also attracts Fringe Benefits Tax which is at the top rate of tax and means more paperwork and another bill to be paid to both the accountant and the tax office.

Be careful here.

Dale
 
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Reply: 3
From: Geoff Whitfield


Mandy,

It's my understanding that the effectiveness of this will have something to do with the kms you will drive- that determines the FBT payable.

I think it's something line- over 45,000 km a year, no FBT. 25,000 to 45,000- $2,000. 15,000 to 256,000- $4,000. Under that I'm not quite sure.

I lease a car and claim all running costs.

There are companies who will run this for you- take a payment out of each pay, reimburse expenses, and submit paperwork. My company wouldn't use one of those- instead I'm being charged $1200 pa for them to do it. A bit steep but I had no alternative.
 
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Reply: 3.1
From: Dale Gatherum-Goss


Hi Geoff


>It's my understanding that the
>effectiveness of this will
>have something to do with the
>kms you will drive- that
>determines the FBT payable.


This is right, although, there are two ways to determine the amount of FBT payable on a motor car.


>I think it's something line-
>over 45,000 km a year, no FBT.
>25,000 to 45,000- $2,000.
>15,000 to 256,000- $4,000.
>Under that I'm not quite sure.


No. This is not right. The number of klms that you travel during the FBT year determines the percentage that is applied against the cost of the car. So, if you travel more than 40,000 klms you will have an FBT of 7% of the cost of the car. Between 25,000 klms and 40,000 klms you will use 11% of the cost of the car; between 15,000 klms and 24,999 klms you will use 20% of the cost of the car and below 15,000 klms you will have to use 26% of the cost of the car.

Thanks for clarifying my points though Geoff.

Cheers

Dale
 
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Reply: 3.1.1
From: Geoff Whitfield


Thanks Dale.

My car was $20,000 so figures were sort of right :)

I travel about 35,000 km pa so I come a little short of the lowest rate. I might have to have a quick drive around Australia in the last week in March.

Dale, did the other method of calculating FBT involve logging actual business kilometres? That would not work for me, though it may well work for Mandy.

I would assume that if have a company car, you cannot claim expenses per km travelling to an IP for instance (just to bring the thread in line with the forum topic!)
And for Mandy- this way of buying a car for me worked out not much more expensive than buying a car for about $6,000 and not running it through a company (as I had done previously). Under that model, running expenses were in post-tax dollars. To give an idea, with my km and car, I have $520 per fortnight (pre tax) deducted from my pay- which covers all lease and running expenses.
 
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Reply: 3.1.1.1
From: Mandy L


Thanks Dale, Geoff and Rolf. Very interesting.

Many people advise against having a car through a company because of the
FBT. My question is, isn't even the maximum FBT rate less than company
tax? and also less than employee income tax rates, if taxable income
greater than $50K ?

Geoff, sounds like you have found there is not much in it, either way,
between buying outright posttax and leasing pretax. I'll be very interested
to hear what Dale knows about in which situations you must log business
kms. Don't want to do that - surely the cost of my time to do that
everytime I use it would outweigh any tax benefits. What is your opinion
Geoff? I know people who do this but I think I'm a bit to lazy for it!

Another question has come to mind now - I assume GST is still payable even
though it is an 'input' to my business. Is this correct?

With regard to the fbt year business kms that Geoff and Dale talk about,
is this the only variable that determines the FBT rate?

I haven't done the numbers yet, but I have heard people say that a standard
car <Magna, Falcon, Commodore etc> + expenses will cost around $15 - 20 K
pre-tax pa <depending on fbt tax rate> in the leasing situation. This seems
rather high given that buying one outright is ~ 30K with say expenses of
$5K pa. What do you think?
 
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Reply: 4
From: Mandy L


Another few questions. Geoff, you are talking about business kms for IP
hunting/maintaining etc. I had not even thought of that. I had only been
thinking of claiming for my reglar business. What happens if you are using a
car for business purposes for several companies or trusts? Do the car
costs get attributed to each in proportion to kms? Or can you only claim
for one?

Geoff, when you say your car cost $20K do you mean that it cost $20K to
buy outright posttax? And then the $6k car, do you mean $6K on a lease?
And then is the $520pf/n for this scenario? Sorry if I'm being a wee bit
slow here, just want to make sure I'm understanding.

Thanks :)
 
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Reply: 3.1.1.1.1
From: Geoff Whitfield


Mandy,

There's not much difference between buying a $6,000 car outright posttax (privately), or leasing a $20,000 car through the company. For the cheap car, I pay expenses posttax.

Logging is not necessary. In my scenario, I pay FBT regardless of what business km. It's the total km which determine FBT payable. They can be private km. If you choose this method, make sure you have a good handle on how many km you drive in a year. You can see from Dale's figures what difference that will make. But if I did use my car a lot for business, I would probably pay less FBT if I drove a lot of business km and used the logging method. My understanding is that you don't have to keep a log book for the whole year- a continuous period of 12 weeks is the minimum.

The ATO has all questions answered- check out http://www.ato.gov.au/content.asp?doc=/content/Businesses/FBT_car_guide.htm

$20K is the cost of the vehicle from the car yard. 1999 Ford Falcon AU with 40,000 km. But the leasing company pays the car people; I pay back on a three year lease. At the end of three years, the lease finishes and $8k is still owed on the car. I pay the $520 per fortnight (pre tax) which covers lease payments, insurance, rego, services, tyres etc.

The $6K car would have been owned by me, not the company. And all expenses come out of my pocket. Being an older car, servicing costs more, as more things go wrong.

I can't answer on GST. I'll leave that to Dale (as I will leave him to correct me- I'm sure to have something wrong). Bear in mind I'm not an accountant- just a person who's been able to drive a reliable family car instead of a bomb thanks to my accountant.
 
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Reply: 5
From: Ross Sondergeld


Hi Mandy,


Tax effectiveness of car options


Mandy said, "I've been doing some research on the most tax effective way to
own or lease cars. What I have found so far indicates that leasing a car to
yourself through your own company is most effective. What I am still wanting
to find out is - whether this varies depending on who owns the company -
whether including rego, insurance, petrol, servicing, washing etc change the
situation as opposed to just doing this with the cost or lease price of the
car" END QUOTE


I'm trying to figure all this stuff out myself. Common Dale...

As at today... commercial hire purchase... is my direction.

ME - Company ATF the Trust. Buy car... but how? Stuffed if I know....




P.S. I like to know the answer before i talk to the experts. (i.e. my
accountant and/or solicitor...)






Ross Sondergeld ~ Buyer Agent

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
" Imagine buying real estate the easy way...
...with a Buyer Agent on your side!!! "

Creative Real Estate Solutions Mobile 0412 289 464
Office 9b, 34 Glenferrie Drive Office (07) 5562 1555
East Quay Corporate Park Fax (07) 5562 1248
Robina QLD 4226, Gold Coast Buyerside@hotmail.com
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


_________________________________________________________________
Send and receive Hotmail on your mobile device: http://mobile.msn.com
 
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Reply: 3.1.1.2
From: Dale Gatherum-Goss


HI Geoff

>I travel about 35,000 km pa so
>I come a little short of the
>lowest rate. I might have to
>have a quick drive around
>Australia in the last week in
>March.
>


Knowing the rates can be helpful if you are close to one of the cut offs.


>Dale, did the other method of
>calculating FBT involve
>logging actual business
>kilometres? That would not
>work for me, though it may
>well work for Mandy.


Yes, Geoff. The other method of calculating FBT does involve a log book for 3 months to record the business expenses. I nearly always find the set rates easier and better to use though.


>I would assume that if have a
>company car, you cannot claim
>expenses per km travelling to
>an IP for instance (just to
>bring the thread in line with
>the forum topic!)


This is correct.

Dale
 
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Reply: 3.1.1.1.2
From: Dale Gatherum-Goss


Hi Mandy


>Many people advise against
>having a car through a company
>because of the
>FBT. My question is, isn't
>even the maximum FBT rate less
>than company
>tax? and also less than
>employee income tax rates, if
>taxable income
>greater than $50K ?


Company tax rates are 30% of every dollar profit. FBT rate is 48.5% and the top personal income ax rate is also 48.5%


>Geoff, sounds like you have
>found there is not much in it,
>either way,
>between buying outright
>posttax and leasing pretax.
>I'll be very interested
>to hear what Dale knows about
>in which situations you must
>log business
>kms.


It is not necessary normally and you can just rely on he total number of klms travelled for the FBT year.

>Another question has come to
>mind now - I assume GST is
>still payable even
>though it is an 'input' to my
>business. Is this correct?


If the company is registered for GST then it may claim back the GST paid within the purchase price of the car. Moreover, he company may deduct the GST that it pays on petrol, serving, tyres and insurance etc from the GST that it collects from its customers and so keep more of that money.

This is one of the benefits of having a car within a company structure.


>With regard to the fbt year
>business kms that Geoff and
>Dale talk about,
>is this the only variable that
>determines the FBT rate?


The formula is a simple cost price of the car x the percentage identified by the number of klms travelled during the year.


>I haven't done the numbers
>yet, but I have heard people
>say that a standard
>car + expenses will cost
>around $15 - 20 K
>pre-tax pa in the leasing
>situation. This seems
>rather high given that buying
>one outright is ~ 30K with say
>expenses of
>$5K pa. What do you think?


I haven't done the numbers either. A lot depends upon the car that you buy, the running costs, the number of klms that you travel etc etc etc.

Dale
 
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Reply: 5.1
From: Dale Gatherum-Goss


Hi Ross

>I'm trying to figure all this
>stuff out myself. Common
>Dale...


There is no one best way. There are many variables and a lot will depend upon your individual circumstances.

Bye the way, at the risk of creating more confusion than I clear, if you account for GST on a "cash basis" I would not use a CHP though, I would use a "chattel mortgage" or other form of financing to get the GST advantages. If you account on an accruals basis, then a CHP is fine.


>As at today... commercial hire
>purchase... is my direction.


Good luck

Dale
 
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Reply: 5.1.1
From: Richard Hunt


Mandy/Others?,

I've attached a spreadsheet developed to compare the relative merits of an employee entering into a novated company lease versus employee lease. It is used by company execs whose employer offer the option to finance a leased vehicle via novated lease thru the company and allows employees to compare the cost of each option.

Spreadsheet won't answer a lot of the questions to need answered (you'll need an accountant for that) but it may just put another piece in the jigsaw puzzle for you.

The spreadsheet been ported from native lotus format and may have lost some functionality - just beware.

Regards
Richard

PS. No tech support provided!
 
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