For many small business owners, acquiring a motor vehicle marks a significant milestone in their entrepreneurial journey. Whether it’s a ute to expand operations or a sleek executive car for client meetings, purchasing or selling a motor vehicle that becomes part of your business assets can be a complex process. In this blog, we will delve into the essential aspects of buying and selling motor vehicles within a business framework, including understanding GST implications, financing options, luxury car purchases, and more.
1. Understanding GST Implications
When it comes to GST (Goods and Services Tax) considerations, it’s crucial to distinguish between a motor vehicle and a car. For GST purposes, a car is defined as a motor vehicle designed to carry a load of less than one tonne and fewer than nine passengers, excluding motorcycles and similar vehicles. Motor vehicles used solely for business and registered for GST can claim a credit for the GST included in the purchase price, provided there is a valid tax invoice.
a) Purchasing a Vehicle Solely for Business Use
If the motor vehicle is exclusively used for business purposes, you can claim the full GST credit for the GST included in the vehicle’s price. This amount must be included in the capital purchases section of your activity statement.
b) Purchasing a Vehicle Used Partially for Business
If the motor vehicle is used partly for business purposes, you can claim a partial GST credit based on the percentage of business use. Only the proportion of the vehicle’s cost related to business use should be included in the activity statement.
c) Purchasing a Luxury Car
Special rules apply for purchasing luxury cars, where the GST credit claim is limited to one-eleventh of the luxury car limit. Luxury cars are vehicles with a GST-inclusive value exceeding the luxury car tax threshold.
2. Financing Options for Purchasing a Motor Vehicle
As a small business owner, you have various financing options when buying a motor vehicle:
a) Chattel Mortgage: This option involves taking a loan secured by the vehicle itself, allowing you to claim the GST credit for the entire purchase price upfront.
b) Car Lease: Leasing a vehicle allows you to claim the GST credit for the GST included in each lease payment, based on the proportion of business use. The amount of the GST credit is not limited to the one-eleventh of the luxury car limit.
3. GST Rulings for Utes
Utes have become a favoured option among small business owners, thanks to their versatility. However, navigating the GST rules for utes can be a bit trickier due to the variations in their specifications and usage.
According to the Income Tax Act 1997, a car is officially described as a vehicle designed to carry a load of less than one tonne and accommodate fewer than nine passengers. As a result, large vehicles like Chevrolet Silverados, Dodge Rams, and Ford F150s, with their carrying capacity exceeding one tonne and not being primarily designed for passenger transportation, are not classified as cars. Instead, they fall under the category of commercial vehicles.
a) Payload Calculation: The GST car limit applies to utes with a payload below 1000kg and a seating capacity for fewer than nine passengers. The payload is calculated as the maximum loaded vehicle weight (Gross Vehicle Mass) minus the unladen vehicle weight (Kerb Weight). This is an important calculation as currently some models of utes fall into the category of a car and not a 1 Tonne Ute, make sure to do the calculations.
b) ATO Ruling: As mentioned above, the ATO has specific rulings for certain utes, such as the RAM 1500 Laramie Crew Cab Diesel MY 2020, where the full GST credit can be claimed, as it is classified as a commercial vehicle.
If the car’s price exceeds the car limit of $68,108, the maximum GST credit you can claim is one-eleventh of the car limit, which amounts to $6,191 for the 2023-24 financial year. Keep in mind that luxury car tax (LCT) payments cannot be claimed as GST credits, regardless of the extent of business use. We’ll explore LCT further in the next section.
4. Luxury Car Tax (LCT) Updates
The LCT threshold varies depending on the vehicle’s fuel efficiency. For fuel-efficient vehicles, the LCT threshold is set at $89,332, reflecting an increase in the motor-vehicle purchase sub-group of the Consumer Price Index (CPI). For all other luxury vehicles, the threshold stands at $76,950, aligning with the increase in the ‘All Groups’ CPI.
Businesses registered for GST are subject to LCT when selling or importing luxury cars that exceed the LCT threshold. Cars falling into this category attract an LCT rate of 33%.
To calculate the payable LCT amount for car sales, you can use the following formula: (LCT value – LCT threshold) × 10 ÷ 11 × 33%. The LCT value includes the retail price of the car, along with GST, customs duty, dealer delivery charges, warranties, accessories, and other incentives. However, it excludes other taxes, fees, insurance, financing costs, and service plans. It’s worth noting that any LCT already paid can reduce the overall LCT amount.
5. Selling Motor Vehicles
When it comes to selling a motor vehicle that was part of your business assets, GST implications and adjustments must be considered.
a) Taxable Sale: Disposing of a motor vehicle is considered a taxable sale, and you must account for GST accordingly.
b) Decreasing Adjustment: If the vehicle was used for both business and private purposes, a decreasing adjustment can be claimed for the business use element.
c) Increasing Adjustment: If you continue to hold a motor vehicle after canceling your GST registration, an increasing adjustment may be required.
6. Exceptions to GST Credits
In certain circumstances you can claim a GST credit for the full amount of GST included in the price of a car even if the car costs more than the car limit. The car must be used in carrying on your business and at least one of the following conditions must be met:
- You hold the car solely as trading stock, other than holding the car for hire or lease
- You carry out research and development for the manufacturer of the car
- You export the car in circumstances where the export is GST-free
- It is an emergency vehicle
- It is a commercial vehicle that is not designed for the principal purpose of carrying passengers (applies to section 3A above)
- It is a motorhome or campervan
- It is a vehicle specifically fitted out for transporting disabled people seated in wheelchairs (unless the sale of the car was GST-free).
If you are a business owner and are thinking about buying a ute here is some extra information about the GST rulings and utes: Learn More
7. FBT Considerations
It’s essential to consult with a tax agent regarding Fringe Benefits Tax (FBT) obligations, especially if the motor vehicle is provided to employees for private use.
As a small business owner, purchasing or selling a motor vehicle for your business can be a significant financial decision. Understanding the GST implications, financing options, and special rules for different vehicle types will help you make informed choices. Remember to seek professional tax advice and stay up-to-date with the latest ATO rulings to ensure compliance and make the most of available credits. With the right knowledge and planning, your motor vehicle can become a valuable asset that contributes to the success of your business.
Note: Figures for the RAM 1500 Laramie Crew Cab Diesel MY 2020 and payload calculations for specific utes are as provided in the ATO rulings, and the GST credit amount may vary based on individual circumstances.