Undeniably welcome news to SMEs, the instant $20,000 tax write-off is even sweeter when you understand it includes motor vehicles in its scope. If your car costs less than $20,000, you can use the tax write-off to claim tax deductions the right away.
The $20,000 tax break allows small businesses to claim an immediate tax deduction for all assets acquired for business use. The assets that are subject to the deduction includes any equipment and could even include motor vehicles.
Here’s a list of things to consider when buying a car and using the $20,000 instant write-off:
- Many vehicles will exceed $20,000
- Goods and services tax (GST)-exclusive $20,000 threshold
- Don’t let the tax break muddle your commercial instincts
- Be careful of private use
- Trading in may put you over the threshold
Many vehicles will exceed $20,000
In practice, many vehicles will substantially cost more than $20,000, and therefore will not qualify for the immediate tax deduction.
Instead, you will write-off these assets over their effective lives. A second-hand car that costs less than $20,000 may be available, making you eligible for the tax break since it includes second-hand assets in its scheme. You may also purchase bits of kit for the car, or equipment to enable you to maintain it, if the the vehicle itself doesn’t qualify.
A tip for business owners is that cars that fit the price range are usually new, smaller hatchbacks, besides the second-hand vehicles of several types you can choose from.
Goods and services tax (GST)-exclusive $20,000 threshold
If the vehicle is quoted or marked at GST-inclusive prices, you can then buy said vehicle even if it is priced up to $22,000, since it is really at $20,000 plus GST.
Don’t let it the tax break muddle your commercial instincts
If you’re only making a vehicle purchase just to avail of the tax break, don’t do it. Doing so defeats the purpose of the tax deduction scheme which is to help you and your small business grow. You must have a real business need to invest in to require the purchase of the vehicle.
Remember, you are still spending money in purchasing the car—with or without the tax break.
Be careful of private use
Bear in mind that ideally, the vehicle has to be used only for your business. You can still claim deduction if there’s an element of personal use, but it must be prorated, reflecting the element of said personal use.
Trading in may put you over the threshold
Remember that trading in on the old car is regarded, under tax law, as being part of the consideration paid for the new unit. So it is wrong to say that you are eligible for the tax deduction just because you traded in your current vehicle for $10,000, in the hopes of buying a new one that costs $27,000.
The difference is $17,000, yes, below the threshold, but as far as tax laws are concerned, the price you’ve paid for the new car is still $27,000, which is above the $20,000 threshold—making it ineligible for the $20,000 instant tax write-off.
Instead, the whole of the $27,000 will have to be written off the car’s estimated effective life.
Again, remember that the $20,000 instant tax break is only available to small businesses, or businesses with an aggregated turnover of less than $10 million. (In some cases, this definition can be quite complicated, so be sure to consult with tax authorities.)
If you are a small business owner or manager and are therefore eligible to claim for the instant tax deduction, make sure you have a very real business need to purchase the vehicle.
If there is none, or if you are unsure, reconsider your plan to get one. Bear in mind that this tax deduction scheme was legislated to help small businesses like yours not only survive, but thrive. Hastily buying a vehicle only to avail of the instant write-off clearly defeats this purpose.