Tax time

At this time of the year many doctors are putting their financial figures together, but most of us won’t want to look at how much less we have in the superannuation account.

In a previous article we calculated that the fastest depreciating car sold in Australia (the Renault Laguna) was still out-performing the All Ordinaries Index over the past 12 months.

And with a shrinking stock market it may be time to develop a new asset class and I propose that cash, property and equities should be joined by an index for second hand cars.

But for anyone in the market for a new vehicle the Federal Government is pitching in with a generous incentive. It’s called the Small Business and General Business Tax Break.

Until 30th June, 2009 tangible depreciating assets purchased for business use will qualify for a one-off 30% tax deduction in addition to the usual deductions for depreciation, interest etc. This deduction applies to items costing over $1000 such as cars, computers and the like.

Essentially, this is a bonus tax deduction which means that a vehicle for business use will attract a tax deduction twice based on the purchase price.

A vehicle purchased by a company for $40,000 will give you an extra one-off tax deduction of $12,000. This equates to an additional refund of $3,600 ($12,000 x 30% company tax rate) when you lodge your return.

A vehicle purchased by a sole trader (an individual with business deductions) still generates a tax deduction of $12,000, but the refund climbs to $5,600 ($12,000 x 46.5% top marginal tax rate).

Doctors who are incorporated usually buy their cars in the name of their income producing entity (ie their medical company) in order to claim back the GST, but they’ll find that their refund will still be calculated at the higher personal tax rate as funds in the medical company are distributed back as salary. As per the example above this provides a refund of $5,600.

As I said at the start of this article the tax deduction is in addition to anything you already claim as a tax deduction such as depreciation, interest, fuel, registration, maintenance etc etc.

The deduction is capped at 30% of the Luxury Tax Threshold for cars costing more than $57,180 (30% of $57,180 = $17,154).

Doctors who lease their cars will find that the Tax Break will be factored into lease prices according to “commercial negotiations”. This is a euphemism for “lots of fine print” so tread very carefully. The principal will be though that the Tax Break is to be claimed by the same person who claims capital allowance deductions in relation to the asset.

Personally, I never lease my cars. I’d rather buy them using my home loan. The interest rate is lower, there’s an interest off-set facility and if my circumstances change I’m totally in control of the financing. Just make sure that the borrowings are totally separate to any personal borrowings.

Some of the fine print of the proposed Tax Break legislation includes the fact that “the asset’s cost for the purposes of the Tax Break is the same as its cost under Subdivision 40-C of the ITAA 1997 (generally its GST-exclusive cost). That is, the same as its cost for the purpose of calculating capital allowance deductions under Division 40”.

In the original draft legislation the Tax Break was still claimable on demo vehicles so long as the car has been used for “reasonable testing and trialling”. This definition would not of course apply to any vehicle that I’ve ever test driven. As this article went to press the draft legislation was changed to exclude demo vehicles so I guess that’s bad luck if you thought you knew what you were doing and have bought a demo.

So if you’re seriously looking at buying a new vehicle before the end of the financial year, I’d recommend taking your accountant along with you for a test drive. And as car sales have dropped by 20% and are the lowest in 14 years there should be some good deals around.

Safe motoring,
Dr Clive Fraser

This entry was posted in Other. Bookmark the permalink. Both comments and trackbacks are currently closed.
  • About

    Medical Motoring is an online record of the articles written by Dr Clive Fraser and published in the Australian Medicine magazine by the Australian Medical Association.