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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#1984383 27-Mar-2018 16:00

My advice would be to talk to your accountant.

wellygary

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#1984392 27-Mar-2018 16:03

+1 , get your accountant to work out the options for you.

FireEngine

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#1984404 27-Mar-2018 16:15

In general no taxman takes "but someone on the internet told me..." as any kind of excuse, where tax is concerned you should take professional advice.

Regards FireEngine

trig42

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#1984405 27-Mar-2018 16:15

Have you told your insurance company that your current car is used for business purposes?

I just changed insurance companies, and they asked quite a few questions around that, as I told them I did occasionally use my car (about once a week) to do work related things. She went away and checked and said that would be OK, but if it got to be more than that, they'd need to know.

If you are claiming business expenses on your car, you might find your insurance will wiggle out of a payout in the event of an accident/loss if you haven't informed them of your accurate business usage in the car.

hsvhel

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#1984408 27-Mar-2018 16:33

You may also then become liable for FBT

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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.

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kryptonjohn

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#1984421 27-Mar-2018 16:51

trig42:

Have you told your insurance company that your current car is used for business purposes?

I just changed insurance companies, and they asked quite a few questions around that, as I told them I did occasionally use my car (about once a week) to do work related things. She went away and checked and said that would be OK, but if it got to be more than that, they'd need to know.

If you are claiming business expenses on your car, you might find your insurance will wiggle out of a payout in the event of an accident/loss if you haven't informed them of your accurate business usage in the car.

IME this only applies if you are carrying stuff, doing deliveries etc. If you are just using the car to transport yourself between place of work and customers then you should be insured. That's with AMI anyway.

Willuknight

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#1984424 27-Mar-2018 17:02

trig42:

Have you told your insurance company that your current car is used for business purposes?

I just changed insurance companies, and they asked quite a few questions around that, as I told them I did occasionally use my car (about once a week) to do work related things. She went away and checked and said that would be OK, but if it got to be more than that, they'd need to know.

If you are claiming business expenses on your car, you might find your insurance will wiggle out of a payout in the event of an accident/loss if you haven't informed them of your accurate business usage in the car.

Yeah I've told them I use it for business occasionally, but because of what I do (mainly graphic design) it wasn't a huge issue. I also work from home, so it's very much an edge case. My car claims are set up on the non logbook clause:

If you do not keep a vehicle logbook you may claim up to 25% of the vehicle running costs as a business expense. However, you could be asked to substantiate the percentage claimed.

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.

Willuknight

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#1984963 28-Mar-2018 14:53

Thanks all for the feedback.

My accountant has given me the green light so will buy as a business, but good to have other perspectives.

mdf

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#1985015 28-Mar-2018 15:46

Agreeing with everyone about talking to accountant.

One thing that might be worth asking about is vehicle leasing. There are a number of providers that offer this, even for small businesses. As I understand it (but IANAaccountant), the tax implications are potentially much more straightforward (no asset to depreciate etc).

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Willuknight

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#1985068 28-Mar-2018 17:56

Leasing is horribly more expensive long term however.

I'm looking at having this car for at least 10 years. If I ever cease trading, I can just sell it to myself at the depreciated value.

richms

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#1985127 28-Mar-2018 20:45

If its used for business then do you really want to be turning up in a 10 year old car?

Richard rich.ms

Willuknight

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#1985143 28-Mar-2018 21:00

My current car (which this is replacing) is 2006. Haha.

Aredwood

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#1985157 28-Mar-2018 21:25

What type of vehicle are you buying? As my accountant said that the tax rules also vary depending on vehicle type and what your job is. So buying a Ute compared to a passenger car might have tax advantages for you.

Also will that $20K car be brand new or not? As sometimes there is very little extra cost to buy a brand new vehicle.

As for depreciation, Consider the effects of electric vehicles becoming mainstream. ICE powered passenger cars will massively drop in value. As lots of manufacturers either have released, or will release passenger EVs. But there is virtually nothing on the horizon as far as EV Utes or vans are concerned.

I wouldn't personally spend 20K on an ICE car right now. Although that also depends on if you have to buy a new car right now. Or would your current car do for a bit longer. And of course your driving patterns.

If you are in Auckland, Consider the proposed new petrol tax as well.

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