Buy a car as a business or as private use

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Willuknight

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#232065 27-Mar-2018 15:58

Hey guys.

I'm self employed. I currently have a car and it's in my name, but I do claim the fixed percentage of its costs for business use. (just stuff like picking up supplies and going to meetings etc). I don't have to do anything complicated, I just use my credit card and my accountant sorts it out for me. I have private insurance which is worth about $500 a year. (for 10k cover).

The car I'm looking at buying is $20k, and insurance looks about $700 for private insurance. I'm trying to decide whether or not I should buy it as an individual or as a business.

+ if i buy it as a business, I can claim the GST back and depreciation

(i don't really know how depreciation works, but the way I think it works is that I can claim 30% of the total value each year as a loss and then that's x amount of money that I don't have to pay tax on? Ie if I make $20k profit, I'd only be paying tax on $17k profit?)

- if it's bought by a business it requires business insurance which is at least $1,500.

Can anyone give me some advice/guidance?

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kryptonjohn

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#1984412 27-Mar-2018 16:39

If your business owns it and you use if for private purposes then it attracts FBT which kinda ruins the benefit (although there is a de minimis of $1,200/yr, your vehicle expense is likely higher).

If your place of work is your home, and you only use the vehicle for work, i.e. leave it in the garage on weekends etc, and you write yourself (as director to employee) a letter instructing yourself to only use it for business, then you can avoid FBT (I am not kidding).

I personally think your best bet is to run a log book (for a two month period where you do a lot of business trips in the car) and then apply the business % to your car expenses (interest, maintenance, fuel, insurance etc) as a deduction. If your business use is < 25% I believe you can use 25%.

As others said, you need to confirm this with your accountant.

cadman

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#1984430 27-Mar-2018 17:17

You say you're self-employed but need to clarify if you're a sole trader. It appears you're not and you're simply claiming back from your company for business use of a private motorvehicle. In which case if the mileage is low you'd be better off simply keeping a logbook to record business trips and reimbursing yourself at the current IRD mileage rate. It's tax free you you, the employee. Last I checked it was $0.73/km and you can use it for up to 5000km/year. Doing that instead of working out the actual cost will save you and your accountant a fair bit of time.

Willuknight:

(i don't really know how depreciation works, but the way I think it works is that I can claim 30% of the total value each year as a loss and then that's x amount of money that I don't have to pay tax on? Ie if I make $20k profit, I'd only be paying tax on $17k profit?)

Well, you've already got a better handle on it than many people who think that buying an asset is it's effectively free because it's "100% tax deductible" and they have no idea what that actually means. Hell, the number of accounts people that don't even realise that GST registered entities don't actually pay GST is astonishing. They actually think it's the businesses money going out with each return! But I digress...

If calculated depreciation on your vehicle is $3k, it is treated an expense against your income, so you save only the applicable marginal tax rate of that $3k - let's say the applicable rate is 28% - you save $840 in tax but it 'costs' you $2160 if the real depreciation actually is that $3k. Then when you sell the vehicle, presumably for more than its current depreciated value, you pay tax on the difference, also at the applicable marginal tax rate.