Margin for GST error
Article written by Max Newnham
Published on the http://www.brisbanetimes.com.au/ on the 27th September, 2016
Are there any tax advantages for buying either new or used for my business?
When a business is registered for GST it can claim a credit for GST input tax included on anything it pays relating to the business, but it also must pay to the ATO one eleventh of all of its business receipts.
The requirement to include GST in the selling price of income earned by a business also extends to the selling value of business assets that are sold. This means where a GST registered business sells an asset, such as a car or land and buildings, one eleventh of the sale proceeds is GST collected and must be paid on to the ATO.
As a part of ATO compliance activities it receives information from different government agencies. These include land titles offices and motor vehicle registration authorities. By matching the asset sales information received against GST returns, the ATO selects businesses for a GST audit when it suspects that GST on assets sold has not been paid to them.
Q. I am a sole trader weighing up if I should buy a new or used car. Are there any tax advantages for one over the other? I think I will be taking out a chattel mortgage to pay for the vehicle as this seems like the best option from a tax perspective. I am GST registered; can I claim the GST back on the new and existing cars?
A. Too often business owners have an unhealthy attitude to income tax. An example of this is a focus on maximising a tax deduction rather than concentrating on what cost delivers the greatest net benefit. In your situation you need to concentrate on what car will produce the best result for your business, and then decide on whether the benefits of the higher-costing, new car outweigh the benefits of a cheaper, used car.
Over time a new car will provide a greater tax deduction only because of its higher initial cost. Where the choice is between a new car costing $30,000, and a used car costing $19,000, the ability to claim a 100 per cent tax deduction for assets costing under $20,000 can produce a greater immediate tax benefit.
To achieve a tax deduction for assets costing under $20,000, which will need to be financed, a chattel mortgage or hire purchase agreement is best because a tax deduction is claimed for interest included in the repayments plus depreciation of the asset. If a lease is used the tax deduction is limited to the lease payments made during a financial year.
Because your business is registered for GST you will be able to claim an input tax credit for the GST included in the purchase cost of the new car, but this will be limited to its business use component.
If you are trading in an existing car you will need to declare one eleventh of the trade-in value as GST collected, which in effect produces a net GST claim being the difference between the GST paid on the new car and the GST received on the trade-in value or sale proceeds of the old car.
Max Newnham is a partner in the accounting firm TaxBiz Australia and founder of www.smsfsurvivalcentre.com.au.