Choosing the right vehicle for your business can significantly impact your tax benefits. Here’s a quick guide to help you make an informed decision.
Key Factors to Consider
Vehicle Use:
Ensure the vehicle is used primarily for business purposes.
Type of Vehicle:
Commercial Vehicles: Utes, vans, or trucks typically provide better tax benefits compared to passenger cars because they are designed for business purposes.
Electric and Hybrid Vehicles: These may qualify for additional incentives and deductions.
Depreciation Rates:
Vehicles with higher depreciation rates can offer larger tax deductions. For example, passenger vehicles generally have depreciation rates of 30% (diminishing value) or 21% (straight line).
Fringe Benefit Tax (FBT) Considerations:
Vehicles not available for private use, or with restricted private use, can help reduce FBT liabilities. Utes and other commercial vehicles often have lower FBT implications if private use is restricted.
Running Costs:
Maintenance, fuel, insurance, and other running costs are deductible when the vehicle is used for business purposes. Efficient vehicles with lower running costs can offer financial advantages.
Purchase Options:
Leasing a vehicle can sometimes offer tax benefits as lease payments are often fully deductible. However, purchasing allows for depreciation claims which can also be significant.
GST Considerations:
GST registered businesses can claim GST on the purchase price of the vehicle if it is used for business purposes.
Practical Steps
Evaluate Business Needs: Determine the primary business use and choose a vehicle type accordingly.
Identify Options and Consult: Get tailored advice based on your specific business situation to ensure you're maximising tax benefits.
Keep Detailed Records: Maintain logs for business vs. personal use to substantiate deductions and minimise FBT.
Scenario: Leasing vs. Buying & Financing a Vehicle
Let’s consider a scenario comparing the tax implications of leasing versus buying a mid-sized van for a sole trader in New Zealand, used entirely for business purposes.
Vehicle Type: Mid-sized van
Purchase Price: $40,000 (excluding GST)
Interest Rate: 8%
Lease Cost: $800 per month (excluding GST)
Depreciation Rate: 30% diminishing value
GST Registered: Yes
Business Use: 100%
Buying & Financing the Vehicle:
Year 1:
Purchase: $40,000 + $6,000 GST = $46,000
GST Claim: $6,000
Depreciation Deduction: $12,000
Interest Deduction: ~$2,962
Repayments: ~$9,733
Total Depreciation & Interest Deductions over 5 Years: $42,000
Total Repayments over 5 Years: ~$48,667
Leasing the Vehicle:
Year 1:
Lease Payments: $9,600
GST Claim on Lease Payments: $1,440
Deductible Lease Payments: $9,600
Total Lease Deductions over 5 Years: $48,000
Comparison:
Buying:
Total GST Claim: $6,000
Total Deductions: $42,000
Residual Value: Asset value available for sale after five years
Leasing:
Total GST Claim: $7,200
Total Lease Deductions: $48,000
Residual Value: $0
Lease v Buy - Conclusion:
Buying: Beneficial if you prefer owning an asset and can manage the upfront costs, with potential resale value after five years.
Leasing: Offers slightly higher total deductions over five years
Disclaimer: This blog post is for informational purposes only and should not be construed as professional advice. It is recommended to seek the advice of a qualified accountant or tax professional regarding your specific circumstances.