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If you’re running a small, medium or large company and looking to purchase a commercial vehicle, it’s important to know how buying a car through a business works in Australia. You can find out all about how these purchases work, as well as the benefits, finance options and whether it’s better to buy a car in your name, right here with Savvy today.
Buying a car through a business in Australia: tax benefits
The main difference between purchasing a car through your business and privately is the way tax is applied. You can claim for a range of expenses when using your vehicle for business purposes, with the ATO stating the following can be claimed as tax deductions:
- Depreciation (your car’s decline in value)
- Fuel
- Insurance premiums
- Lease payments
- Oil
- Repairs and servicing
- Vehicle loan interest
- Vehicle registration
However, you can only claim for the portion of your vehicle’s business use. This means it’s important to separate private from commercial usage, which can be done via several different methods:
- Logbook method: involves recording details of each trip you take, such as the distance driven, purpose of the journey
- Cents per kilometre method: involves multiplying the kilometres driven for business purposes by the rate set by the ATO for that financial year
- Actual cost method: involves supplying receipts for vehicle running and repair costs (must be used by companies and trusts, as well as sole traders and partnerships if other vehicles are also being claimed for)
You’re also generally able to claim a GST credit on the purchase of your business vehicle, with the amount you can claim for also determined by the business portion of its overall usage. Businesses who exclusively use their vehicles for commercial purposes will be able to claim the full GST amount (up to the set car limit), while those who are buying a car for both business and personal use in Australia can claim a partial credit.
What to consider before buying a car through your business
The biggest thing to consider before you decide to purchase a vehicle through your business is whether it actually needs a car. Think about your day-to-day usage will help inform your decision.
How often are you on the road visiting clients compared to the amount you use it personally? Do you have a range of tools or other equipment you need to transport between worksites, or delivering goods to different locations, that can’t be achieved by a private-use car? Asking yourself these questions will help you work out how to choose the right car for your needs.
Additionally, it’s worth noting that a vehicle purchased through a business but made available for private use to an employee or sole trader is likely to be subject to fringe benefits tax (FBT). This is charged at 47% of the grossed-up value of the fringe benefits, meaning the gross income (at the highest marginal tax rate) required for an employee to purchase the benefit themselves.
Should I buy a car through my business or purchase it personally?
Ultimately, whether you buy a car through your business or privately will depend on your individual situation. If your vehicle will be used 100% of the time for business purposes, you may decide the cleanest solution is to make the purchase through your business. However, buying a car for business and personal use in Australia may not be as easy a decision.
Some of the benefits of each option are as follows:
Benefits of buying a car through your business
- Wide range of potential tax deductions, including running costs, loan interest and GST
- Often more suitable when a clear majority of the use is commercial
Benefits of buying a car privately
- No FBT chargeable on private vehicle purchases
- Often more suitable when business and personal use is more even (or skewed towards private)
It’s worth seeking out advice from a tax professional if you’re unsure of which option is more suitable for your needs.
What are my options for financing the purchase of a car through my business?
There are several ways to go about financing your business car, including the following:
- Chattel mortgage: similar to a car loan, the business borrows money to purchase the car, which becomes a business asset owned from the outset. The loan is secured against the car, with flexible repayment terms (from one to seven years) and potential tax benefits like claiming GST on purchase price, interest on repayments, and depreciation. However, a minimum 51% business use is required.
- Hire purchase: under this arrangement, a lender purchases a vehicle and provides your business with access to it. The business makes regular payments throughout the term, with ownership transferring to them once the final payment is made.
- Car lease: businesses lease the car from a financier for a fixed term (usually one to five years) with lower monthly repayments than a chattel mortgage due to the car's residual value. Depending on the type of lease, you may have the option to purchase, trade in or hand back your vehicle or extend your existing lease.
- Novated lease: different from the other options, this is a product available to employees and financed through their business. It’s a salary packaging arrangement between employer, employee and financier. The employee sacrifices pre-tax salary for lease payments, reducing taxable income. It also offers a GST discount on the purchase price of the car. It can be used 100% for personal purposes.
According to Bill Tsouvalas, Managing Director of Savvy:
“It’s essential to take the time to learn about each type of commercial finance, as different products will better suit different businesses.
“For instance, if you’re looking for a consistent turnover of vehicles and the ability to update them every few years, leasing is likely to be a more suitable option for you than chattel mortgages.
“On the other hand, commercial hire purchase agreements may be better suited to businesses requiring off-balance sheet accounting.”
If you decide to purchase your vehicle privately, you can take out a standard consumer car loan instead. Savvy can help you compare a wide range of commercial and private car finance options, so you can apply with us today to find out more about which product may be best for you.
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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.
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