22 May 2011 | Income Tax
Before this year’s federal budget there were five ways a business owner could claim for claiming motor vehicle expenses. As a result of the change, allegedly to clamp down on tax avoidance, the choice will reduce to four because the rules relating to car fringe benefits will be changed.
Business owners that have used the statutory method to claim motor vehicle expenses under fringe benefit tax system, avoid being embroiled in the hassle of keeping a low book for 12 weeks, will find that this will no longer be a tax effective.
Of the methods for claiming motor vehicle expenses, for owners employed by their business that travelled more than 25,000 kilometres a year, the FBT system provided a reasonable tax deduction with little to no work.
When the FBT system was introduced the private use of a motor vehicle was taxed either by establishing the actual private usage, or paying fringe benefits tax based on the cost of the motor vehicle multiplied by rate. The lower the number of kilometres driven each year the higher the percentage used to calculate the taxable amount.
The four percentage rates and relevant kilometres are:
26 per cent Under 15,000 kilometres
20 per cent 15,000 to 24,999 kilometres
11 per cent 25,000 to 39,999 kilometres
7 per cent more than 40,000 kilometres
For example a car that cost $30,000, which did 26,000 kilometres a year, paid fringe benefits tax on $3300. Under the changes announced the four tiered system will be replaced by one rate of 20 per cent. This would result in fringe benefits tax being paid on $6000.
For those business owners that want to maximise their tax deduction for motor vehicle expenses the log book method is still the best. This does require a log book to be kept for 12 weeks, but it is the only way to establish what the exact business use of a vehicle is.
The secret of keeping a log book, and therefore maximising the tax deduction, is to make sure for the 12 weeks that you organise yourself so your private travel is kept to a minimum. Rather than making two trips for a personal and business use, such as buying lunch and stationery, the trick is to do it in one trip.
If the primary purpose of the travel is for business such as buying stationery, and there is no extra travel involved, if lunch is purchased at the same time the whole trip will be classed as business.
Where the thought of keeping a log book for 12 weeks is too daunting the other three methods, which are all based on kilometres driven, can still produce a decent tax deduction. Under the first method the kilometres driven in a year, up to a maximum of 5000 kilometres, are multiplied by a cents per kilometre rate depending on the engine size of the vehicle.
The other two methods can be used for motor vehicles that drive 5000 or more kilometres a year. Under the first a claim is made for one third of all running costs including fuel, repairs, insurance, and ownership costs such as depreciation or lease payments.
Under the other method a claim is made for 12 per cent of the cost of the vehicle. For example a vehicle that cost $40,000, which did more than 5000 kilometres a year, would result in an annual tax deduction of $4800.
In the final analysis a business owner must weigh up whether the extra effort of keeping a log book for 12 weeks is justified by the extra tax deduction.