As your new business starts - or existing business expands - you’ll no doubt consider buying a vehicle. This is a big purchasing decision and milestone in your business journey that can help boost your revenue and set you up for the future. Whether you’re looking for a chattel mortgage, novated lease or an unsecured business loan, Driva can help with all of your business finance requirements.
With any large asset purchase, there are a lot of important things to take into account before departing with your money. That’s why we’ve prepared our top 4 things to consider when buying a vehicle for your small business so you can proceed with confidence:
1. Will it suit your business needs?
It’s important to first create a list of your vehicle needs and wants before you start your buying journey. This list should form part of your business plan and be something you continue to update and revise as your small business grows.
If you’re a builder, electrician, rural producer or goods delivery service your entire business operations may well rely on your vehicle. In these cases, you may need storage space with a high roof, a secure and covered vehicle or plenty of room for tools and specialised equipment. On top of this, there may be foreseeable industry changes and vehicle specifications you’ll require in the future you’ll want to keep in mind. For example, if you’re a florist and plan on delivering to your customers in the Summer months, interior refrigeration capabilities may be necessary for operations (add it to the essentials list!).
2. What are the operating costs involved?
The full cost of a vehicle doesn’t end with the purchase, you’ll also need to account for the ongoing operating costs including insurance, roadside assistance, registration, repairs, servicing and weekly petrol. With the average monthly cost in 2020 of owning a small car at $928.64 and a 4WD wagon at $1804.61, these car expenses can add up to significant amounts over the vehicle lifetime impacting your cash flow.
By choosing to apply for a business car loan, (as opposed to an initial lump sum payment) you can enjoy the benefits that come with owning a car whilst simultaneously spreading out the cost of that vehicle over a longer period of time, easing your small business cash flow. To find out more on this and if it’s the right option for you check out our blog, ‘6 Benefits Of Buying A Car On Finance.’
3. Should you buy the car in your personal name or in the business name?
This decision will largely depend on what percentage of your car’s trips are likely to be used for business vs pleasure. If the car will be used exclusively for work then it makes sense for the business to buy the car. However, if you expect to use the car largely for school runs, beach getaways and shopping trips then it may be easier to claim the car’s business use as a personal tax deduction.
If obtaining car finance is the desirable option for funding your vehicle you can either use your personal credit to borrow money for your business or your business credit. However, the latter can be more advantageous because it helps build your business' creditworthiness and may allow you to deduct your vehicle sales tax. For a full list of tax implications, we recommend checking out the ATO website and also consulting your accountant.
While the business vs. personal use question might seem trivial, it completely changes the lenders you will be eligible for, and in turn, the interest rate and monthly repayment you will receive. Thankfully, Driva’s easy to use platform does the hard work for you, and will automatically show you your best rates from the commercial (or consumer) lenders that you’re eligible for.
Business owned vehicle
If your car is exclusively for business use, or it will be mostly used for business purposes, it makes sense to buy it in the business name. If you do use your business vehicle for personal use occasionally, such as for a quick trip to the grocery store, then that’s totally fine - but there will be a FBT (fringe benefit tax) implication.
Is it better to buy a car through my business?
If you’re going to be using a car for business purposes the majority of the time, it’s definitely worth buying a car through your business. There are many tax benefits, which vary depending on the type of loan you’re getting, but you might be eligible for tax deductions for a range of motor vehicle expenses including interest payments or depreciation. Additionally, you may be able to claim GST back on the purchase price of the car.
Can I use my ABN to buy a car?
If you have an ABN, and your business is registered for GST, you can claim a GST credit for the amount of GST that is included in the price of your vehicle.
Privately owned vehicle
An alternative option is to purchase the vehicle in your own name. If you’re using a car for business purposes as well as for personal use, you’ll need to make sure that you can identify (and justify) the percentage of time that you’ve used the car for business purposes, so that you can claim a tax deduction. It is recommended to use a logbook to record your personal and business travel.
Depending on whether you’re a sole trader or operating your business as a partnership, or if you’re operating it as a company or trust, there are several methods available for claiming business vehicle expenses.
Cents per kilometre method
With the cents per kilometre method, you’ll need to multiply the total business kilometres you travelled by the rate set by the ATO. For 2020-21 and 2021-22, the rate is 72 cents per km. You’re able to claim a maximum of 5,000 business km per car each year.
Suitable for: sole traders and partnerships
Vehicle type: car
Another option if you’re financing a car is to use the logbook method. With this method, you’ll need to record things like the reason for your journey, kilometres travelled and start and end date of the journey after every trip (a complete list of what your logbook must contain can be found on the ATO website).
After keeping a detailed logbook, you’ll need to work out your business-use percentage (distance travelled for business divided by total distance travelled, then multiplied by 100). Next, you need to add up your total car expenses for the income year and multiply your total car expenses by business-use percentage.
Suitable for: sole traders and partnerships
Vehicle type: car
Actual costs method
The final method is to use the actual costs method. Actual costs are based on receipts p[rovide for all business-related vehicle expenses, and you’re able to claim the percentage of actual costs that relate to the business use of the vehicle. If you use the actual costs method to work out your deduction for expenses, you’re normally able to claim a deduction for capital expenses (ie: the purchase price of the vehicle) over a period of time. This is referred to as depreciation. Note that there is a limit on the amount you can use to calculate your depreciation claim if your business vehicle is a car.
Suitable for: sole traders, partnerships, companies or trusts
Vehicle type: any vehicle type
4. Which finance option suits you best?
Once you’ve made the decision to buy a vehicle for business purposes, and have weighed up the costs involved, the next step is to finance it! The most straightforward way of financing a vehicle is to buy it outright, but this is not a financially viable option for all businesses. Instead, you might be considering your car finance options.
Here are some of the main business vehicle finance options available:
A chattel mortgage is a type of commercial loan used to purchase a vehicle, where the financier lends the money to buy a vehicle and the borrower makes monthly payments. Although the business assumes ownership over the car, the lender still has a ‘mortgage’ over it until the loan is paid in full.
This type of car financing is generally best suited, and most beneficial from a tax point of view to small businesses and partnerships who are using the cash method of accounting, or if you’re a sole trader. This is because GST is only applied to the vehicle’s purchase price, meaning that the business can claim it back on that price upfront (it is not applied to things like balloon payments or repayments). You might also be eligible for the instant asset write-off scheme, which allows businesses to claim the depreciation amount as a tax deduction in one hit, as opposed to gradually over a period of a few years. If you have an annual turnover below $500 million, you’ll probably be eligible for the instant asset write off scheme. If you bought your car by 31 December 2020, the instant asset write off scheme is available for purchases up to $150,000. Learn more on the Australian Taxation Office website here.
A finance lease is a finance product where a customer is allowed the use of a commercial vehicle while enjoying the benefits of ownership. However, the lender technically retains ownership over the vehicle until the loan term has concluded and the necessary residual payments are made.
A finance lease is a great way to optimise your cash flow management by preserving your working capital and fixed payments. This type of finance product is typically suitable if you’re a sole trader, or for partnerships and companies who are registered for GST and seeking to claim back the GST on a monthly basis, without the need to obtain immediate ownership of the asset.
Novated leases are a type of car financing that is used with salary packaging, so is suitable for employees rather than for buying a business vehicle. With this finance product, your employer will pay for your vehicle lease and running costs out of your salary package, normally through a combination of pre-tax and post-tax salary deductions. This is often quite a tax-efficient way to buy a new vehicle because although it isn’t technically a business vehicle, the car is treated as such.
This form of financing can be suitable for a wide range of drivers, regardless of how much money you’re earning! Even for someone with a modest salary, reducing your taxable income results in paying less tax, so it ends up being quite a tax-effective option. Additionally, it’s a relatively stress-free path to car ownership that can suit people who are looking for an efficient and affordable way to buy a used or new car every 1 to 5 years.
Depending on whether or not the novated lease arrangement is a bona fide lease or a non-bona fide lease agreement, you may be liable for fringe benefits tax (FBT), which you can learn more about on the ATO website.
Commercial hire purchase
A commercial hire purchase arrangement can be a great option for those who are wanting to purchase a business vehicle but don’t have the capital on hand to do so right now. With this arrangement, you’ll normally make a deposit, then pay back the car in regular instalments. At the end of the repayment period, you’ll gain complete ownership of the car.
Consumer loan options (sole traders only)
If you’re a sole trader, you’re in a great position because you’ll be able to access both consumer and commercial loan options. With a consumer loan, you’ll need to decide whether you’re after a secured or unsecured loan. A secured loan means you’ll put up your new car as collateral and will be able to access a lower interest rate. Conversely, with an unsecured loan, you won’t need to put up any collateral but will end up paying a higher interest rate.
5. What other tax benefits are there?
As we’ve mentioned, there’s a wide range of tax benefits available if you’re purchasing a vehicle to use for business purposes. From claiming GST credit to the instant asset write off scheme and other tax deductions, there are a number of tax benefits that make buying a car for business purposes a very appealing decision.
Tax-deductible motor vehicle expenses
If you’re a business owner, you’ll be able to claim a number of car related expenses, provided that the vehicle is either owned, leased or under a hire-purchase arrangement. These expenses include:
- Petrol and oil
- Lease payments
- Interest on a vehicle loan
Can I buy a car for my business and write it off?
If you’re buying a commercial vehicle that will only be used for business purposes, you’ll likely be able to claim a GST credit for the amount of GST included in the price of the vehicle. If you’re only using the car for business purposes for part of the time, you’ll only be able to claim a partial GST credit.
Buying a business vehicle is an exciting move, and a great way to take your business to the next level! Financing your new set of wheels can be a bit more stressful though, and that’s where Driva comes in. We pride ourselves on taking the hard work out of finding your perfect car loan, so you can spend more time building your business.
To get started, you can apply online using our simple platform here. You’ll just need to provide a few details about you, your business and the type of vehicle you’re looking to buy, and our smart financing platform will automatically find your best rates.
If you have any queries please get in touch today with one of our commercial vehicle finance experts on 1300 755 494 or firstname.lastname@example.org and we can help find the best finance option for your small business.