What's the most tax effective way to buy a car?

Buying a car can be a major financial commitment, so it makes sense to check how this purchase could influence the tax you pay. Depending on your financial situation and how you plan to use the car, there may be several strategies available to claim tax deductions on your car purchase. It’s important to compare the available options to work out which one may be the most tax-effective choice for you.

Buying a car for work 

In most cases, you can only claim tax deductions when buying a car if you’ll be using it for work. This could include running your own business or operating as a sole trader, or for using your own vehicle while working for an employer.

The more you use the car for work purposes, the more you may be able to claim in tax deductions. According to the Australian Taxation Office (ATO), this doesn’t include driving between your work and your home, but may include using your own car to:

• perform your work duties – for example, if you travel from your regular place of work to meet with a client
• attend work-related conferences or meetings away from your regular place of work
• deliver items or collect supplies
• travel between two or more separate places of employment, but not if one of the places is your home – for example, when you have more than one job
• travel from your regular place of work to an alternative place of work (that isn't a regular place of work) and back to your regular place of work or home
• travel from your regular place of work or your home to an alternative place of work that is not a regular place of work – for example, a client’s premises.

You can track your use of the car for work purposes either by tracking the number of kilometres you travel for work, or by using a logbook to work out what percentage of your car’s use is for work.

Instant asset write off 

If you run a small business, you may be able to claim an instant asset write off on your taxes when you purchase a depreciating asset such as a car for business use.

To qualify for an instant asset write off, your business will need to fulfill the ATO requirements, such as earning less than a maximum aggregated turnover and purchasing an asset under a maximum price threshold. There is a car limit that caps the maximum value you can use when calculating your claim.

Consider contacting the ATO and/or a tax accountant for more information on whether an instant asset write off may be the right choice for your finances.

Car loans 

If you’re paying for your work car using a standard car loan, you may be able to claim the interest on the repayments as a tax deduction. Other work-related vehicle expenses may also apply.

Chattel mortgage

A chattel mortgage is essentially a secured car loan for work purposes. While often used by businesses that provide cars to their employees for work use, they can also be used by individuals who are sole traders or small business owners.

Using a chattel mortgage to buy a car may allow the business owner to claim interest charges, depreciation and GST on the car’s purchase price as deductions when completing taxes.

Novated lease

A novated lease is where an employer leases a car for an employee’s use (which can include personal use) and pays for the lease using the employee’s pre-tax salary as a salary sacrifice. Because this lowers the employee’s taxable income, it can help to reduce the tax an employee pays.

However, there may also be fringe benefits tax to consider, and because you’re only leasing the car, you may not own the vehicle outright at the end of the novated lease, though some financiers offer a purchase option.

Getting more help

The ATO often pays close attention to car-related tax deductions, and mistakes or deceptive claims could lead to significant penalties. To make sure your car purchase is tax effective, you may want to first consult with a tax accountant or financial adviser. These experts can look closely at your personal financial situation and advise you on a course of action that best suits your household’s needs and budget.

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