Company or personal name? What you need to know when buying a car
One of the most common questions an accountant gets asked is
“should I buy my car in the business or personal name?”
Every day we help them answer this question and save their clients thousands of dollars in the process. Below are the key reasons it is more tax effective and cheaper for a business to run their vehicles on a novated lease instead of a chattel mortgage.
Company Tax vs Income Tax
Back when you first started your business, your focus was on putting all your deductible expenses through the company. After all, there wasn’t much money left to take home, which meant there wasn’t much income tax to save; less than the company tax rate anyway. Now that your business has grown up and you’re taking more money out of it, your income tax rate is higher than your company tax rate.
When this happens, you need to start looking for expenses that can be deductible in your personal name (at the higher tax rate) and out of the company (at the lower tax rate). The biggest of these is likely your car. Moving it to a novated lease allows you to reduce your income tax through salary sacrificing, giving you greater tax savings than what the company would have received.
Fringe Benefits Tax (FBT)
When we hear FBT, we think it’s a big business tax, and it’s not. If you’re a company and you provide a car to yourself or your staff, then you could be liable for FBT.
What is FBT? It’s a 47% tax for companies providing perks in place of salary. The ATO knows the company tax rate is lower than the tax rate individuals pay on $90k pa. It’s certainly well below the top tax bracket of 47%. If you start trying to give yourself or an employee benefits instead of salary FBT legislation says you are going to have to pay FBT on it at the 47% rate. Cars are one of the most common of these “fringe benefits” and the ATO has made it clear, cars in the company that are being used to and from work and on the weekends, are firmly in their sites because in most cases those trips are personal and will attract FBT.
When you move the car out of the company and salary sacrifice it on a novated lease on Lendly Pay, there is no FBT payable.
It’s on almost everything, especially when we look at car ownership. You pay GST on the purchase price and the running costs.
As a GST registered business, you initially see the GST in the purchase price as a nice little cash injection in your next BAS. You also get to claim all the GST on the running costs on the way through. What’s overlooked is at the end when you sell the car, yes you got to claim the GST in the purchase price, but did you know that you pay GST back on the sale?
With Lendly Pay, you get the GST savings without the need for the car to go into the company name. You finance the ex-GST price of the car and you get GST savings on the running costs. But in the end when you sell the car it’s in your personal name, not the company, so no GST is paid on the sale.
Depreciation is usually the biggest tax benefit a company gets on a car. Using the diminishing value method, your accountant will claim 25% of the vehicle value year on year. This gets you a pretty big tax deduction in year one and a little less each following year. But don’t be fooled, the ATO only lets you claim the ACTUAL depreciation of the car. Which means when you sell the car (and after you pay the GST back) it’s very likely you’ll sell it for more than what it’s been depreciated down to. Which means you have to pay the tax back on the difference.
With a novated lease you don’t depreciate the car, and even though you’re building equity in the car using pre-tax dollars, you don’t pay tax on the money you make when you sell it.
We’re tired of seeing small businesses and their employees pay more tax than the big guys; all because they haven’t been given access to tools those companies have been using for years. Lendly Pay was built by a small business for small business. Using our Total Cost of Ownership analysis, we help business owners understand the savings they can achieve by taking their vehicles out of the company and putting them on a novated lease via Lendly Pay.
Contact us now for your free Total Cost of Ownership analysis on your vehicles.