Cars and self-employment

All business owners should optimize the tax treatment of their cars.

Business owners can typically achieve a level of tax deductibility for the running costs of multiple cars. To do this, the owner must be operating with a company or trust structure. The company or trust makes a car available to the owner for private use. There is no limit to the number of cars that can be made available for this purpose.

Because the car is being used for private purposes, it constitutes a fringe benefit being paid by the employer (that is, the company or trust) to the employee (that is, the owner).  As a result, the company or trust must pay fringe benefits tax. To reduce the fringe benefit tax payable by the employer (which is the highest tax bracket 47%), the employee should reimburse the employer with the portion of car expenses used for private purpose during a FBT year. The amount of fringe benefits tax (reimbursement) varies according to each situation. The amount of tax payable (reimbursement) is a direct function of the purchase price of the car (where more expensive cars give rise to a higher fringe benefits tax payment (reimbursement)) and an inverse function of the distance that the car travels during the fringe benefits tax year (where the further that the car is driven, the less fringe benefits tax (reimbursement) is payable).

Because the company or trust pays fringe benefits tax, the company or trust may also claim a tax deduction for the running costs of the car.  Once again, these costs include things like petrol, insurance, registration, mechanical repairs and depreciation.

So, the company or trust simultaneously pays fringe benefits tax on the second and subsequent car while also claiming a deduction for the running costs of that car.  Many running costs increase the further a car is driven. Conversely, the further the car drives, the lower the FBT payable.

Putting these two things together, in situations where a car drives 15,000 km a year or more, the deductions available for the costs come to more than offset the FBT payable, and the owner achieves tax deductibility for up to 75% of the running costs of the second or subsequent car.

Luxury cars

In Australia, there is an upper limit on the value of a car for which a tax deduction can be claimed. That limit is known as the ‘luxury car depreciation cost limit’ or ‘car cost limit for depreciation’ and is currently set at $57,581 (2018 – 2019 FY). This means if a person pays more than $57,581 for a car, they can only depreciate $$57,581 and the excess cannot be depreciated. Similarly, if the purchaser is registered for GST, they can only claim the first $5,234 of GST paid as an input tax credit.