Company vehicles aren’t just executive perks. Dealt with the right way, they can really grow your business
Borruso’s Wood Fired Pizza and Pasta restaurant is growing into a nice steady business. In fact not only are customers continuing to come through its doors but it is also increasing its pizza delivery.
The latter has resulted in the purchase of a third vehicle for the business.
“The first two cars we bought were through hire purchase and the latest one is through Chattel Mortgage,” says owner Jamie Borruso.
“There are a lot of benefits to purchasing a vehicle through Chattel Mortgage, such as no capital outlay and interest charged and depreciation of the vehicle are tax deductible.”
A Chattel Mortgage is classed as a cash sale in that the goods automatically become yours on purchase and the finance company takes a mortgage over the chattels. For tax purposes, however, you can claim depreciation, running costs and interest paid against your business income. The Chattel Mortgage allows businesses to claim the full input tax credit from GST incurred expenses immediately with your next BAS statement.
“I also like hire purchase because at the end of the four-year period you own the vehicle,” Borruso adds. “You have obviously lost a lot of value but if you can sell the vehicle for $10,000 or so, it is money in your pocket.
“Our delivery side of the business has really grown and we are always looking at the best options to hire or lease vehicles. We take advice from our accountants and we will more than likely be acquiring more vehicles in the future.”
Restaurateurs and caterers face many decisions when it comes to fleet purchase. Whether to buy outright using their own money or seek a hire purchase agreement are the obvious two. But even with the latter, you have to decide whether to pay all of the loan in monthly installments or have a balloon payment at the end to secure ownership.
Of course this will also depend on your cashflow. Financing a vehicle through a lease or hire purchase arrangement, means more working capital remains in the business. Also when purchasing a vehicle through a lease or hire purchase agreement, the lease or interest payments are deductible to the business.
“There are many benefits of having business vehicles for restaurateurs and caterers,” says Con Roubis, director of Savva & Roubis Chartered Accountants. “It allows you to claim your vehicle cost as well as running costs. This may be a significant deduction in your business.
“GST may also be claimed upfront on certain hire purchase arrangements where the entity is registered for GST on an accruals basis. Finally, depreciation of up to 25 per cent per year can be claimed on the value of the motor vehicle capped at the luxury car limit of $57,466 for the 2010-2011 tax year.”
Expenses incurred using the vehicle that are tax deductible include petrol, oil, repairs, servicing, new tyres, lease charges, interest on any borrowings used to acquire the vehicle and car washes/polishes. There are tax issues restaurateurs and caterers not only need to be aware of but also keep records to appease the Australian Tax Office.
“Certain vehicles are not subject to Fringe Benefits Tax,” Roubis says. “They include vans, utilities or other commercial vehicles [ones not designed principally to carry passengers] or where private travel is incidental to the duties of employment or the travel is ‘minor, infrequent and irregular’.”
When it comes to fleet management, it is best to turnover your fleet on a regular basis to maximise your tax benefits.
“It is recommended that the fleet be changed within the warranty period,” Roubis says. “This is usually a period of three years. By ensuring the warranty is still valid, the maintenance cost of the vehicles is reduced and the resale value remains high. Where the vehicle travels extensive distances, changing the fleet before the 100,000km mark is also recommended.”
If your business is growing and you need to have more than one vehicle, it will affect your tax. “The main tax effect in this regard is that the relevant tax expense and depreciation claims by the business owner are likely to be higher so that the owner would need to ensure that sufficient taxable income is being generated by the business annually to absorb the tax deductions generated,” says Garry Addison, CPA Australia senior tax counsel.
“Where the annual tax deductible expenses exceeds the taxable income generated by the business in a particular income year then such excess claims have to be carried over and claimed in the next year’s tax return of the business.
“If an additional vehicle is only used partially for business purposes then any expense/depreciation claims would need to be appropriately pro-rated as deductions can only be claimed in respect to business use of a vehicle. Deductions cannot be claimed where a vehicle is used solely for private purposes.”
But always consult your accountant if in any doubt over what you can claim and can’t. The most common mistake small business owners make is a failure to adjust expense deduction and depreciation claims for the private use of the vehicle.