Investing in technology and processes to improve the SME experience. In order to provide SMEs with e...
When buying a vehicle for your small business there are a number of important things to consider before signing the paperwork and handing over payment. Many small business owners are often unaware that there are multiple car loan options available. These include secured or unsecured car loans, chattel mortgages, car leases and even personal loans. Below is a step-by-step guide to buying a vehicle for your small business to ensure you are well prepared for when the time comes.
Step one: Determine what type of car will best suit your business needs
Before buying a vehicle for your small business it is essential to ensure that the vehicle you intend on purchasing meets the needs of the business. Compiling a simple list of the needs and wants of the vehicle before searching can save time and money. In many instances, the type of vehicle required will largely be dictated by the industry your business operates in.
For example, if you are an electrician, plumber or carpenter then a Ute or caddy vehicle might be the best option. If your primary service is delivering goods, a vehicle with ample storage space and a high roof clearance would be ideal. Alternatively, if storage isn’t necessary, a standard sedan, SUV or hatchback could be the best option.
Step two: Should you buy the vehicle in your business name or your personal name?
This will largely depend on the intended use of the vehicle and the percentage of time the car will be used for business versus personal trips. If the car will only be used for business purposes, then it makes sense for the business to buy the car. If the vehicle will be used for both business and personal use, then the decision will likely be based on the percentage it will be used for each. For vehicles that will primarily be used for business trips, e.g. 51% or more, then it is generally in your best interest to apply for a business car loan.
Alternatively, if the car is primarily for personal use, you may be able to deduct business expenses based on the percentage of use. It’s best to consult your accountant when trying to decide the right product for you, based on your usage . When considering buying a vehicle for your small business, the question as to whether the car is bought in your name, or the name of your business will also have an impact on the types of car finance available to you.
Purchasing through your business will open several financing options including chattel mortgage, finance lease, commercial hire purchase and secured car loans.
If you decide to purchase the vehicle under your own name a consumer car loan will be the more common financing option. It is also important to note that the decision can also impact the interest rate and the weekly, fortnightly or monthly repayments you will be required to make. Depending on the product, purchasing under a business name can make you eligible for claiming certain items at tax time including interest and depreciation.
Step three: What costs are involved in buying a car for your small business?
Before buying a vehicle for your small business it is important to consider and look at all the costs involved, as the full cost of vehicle ownership doesn’t end with the purchase price. You also need to factor in the ongoing operating costs as well as wear and tear and your loan repayments (if applicable), along with day-to-day running costs.
If you are planning on financing part or all of the purchase price, it is important to understand what your loan repayments might be before making a purchase. One easy way to find out an estimate of your car loan repayments is to use our online car finance calculator. Simple to use, it will help you work out how much you can borrow to ensure you stay on budget and within your borrowing capabilities.
Applying for pre-approval will also provide you with a clear indication of your possible repayments and the amount you can borrow. Pre-approval is when a lender conditionally approves your car loan subject to your final credit approval and the invoice from the dealership or notice of sale from a private seller.
When buying a vehicle for your small business, a business or consumer car loan allows you to take advantage of the benefits of having a car to use for business purposes whilst also not being required to pay an upfront lump sum, but rather spreading out the cost over a period of time, easing pressure on cashflow.
The day-to-day running costs of the vehicle should also be factored into your cash flow and monthly expenses. Be mindful to account for insurance, roadside assistance, registration, servicing and repairs, tolls, petrol and cleaning and upkeep. In 2022, it was reported that the average running cost per month of running a small car was $857.16 and for a light commercial vehicle $1,505.14.
Step four: Finance
Below are some of the options available for business car loans.
With a chattel mortgage, the lender places a mortgage over the loan to act as security. As with any other loan type the lender still lends you the money for the purchase and you are required to make regular repayments.
If you have a balloon payment with the loan, once the balloon payment has been paid in full the mortgage is removed. Generally, with a balloon payment, there is often an option to refinance or trade the car in at the end of the loan period. This type of loan offers flexibility, typically lower interest rates, and the ability to claim interest, depreciation and GST.
Car leases are designed specifically for business purposes. Basically, a car lease works like a long-term rental where the chosen lender will purchase the car and then lease it back to you for an agreed regular payment. Typically, at the end of the lease period, you can choose to restart the lease, trade the car in or pay the final amount to purchase the car outright.
With a hire purchase, the lender will purchase the car and you will hire it back from them. A hire purchase is usually between one to five years in length and once the price of the car and the interest have been paid off ownership will transfer to you. This type of loan can be beneficial if you are registered for GST on an accruals or cash accounting basis, as GST is only charged on the fees and interest, not the monthly repayment amounts.
Financing options for personally owned vehicles
No doc or low doc car loans
These types of loans are well suited to sole traders whose income amount may fluctuate. Generally, sole traders use a car for both personal and business use which these types of loans allow. One downside is that no doc or low doc loans often have higher interest rates to cover the additional risk to the lender. They also can often be more restrictive when it comes to the length of the loan, the amount you can borrow and the ability to make extra repayments.
Consumer car loan
If you determine that the vehicle will predominantly be used for personal use, then you would have the option of applying for a consumer car loan (personal loan).
Buying a vehicle for your small business can potentially give you multiple tax benefit. These include claiming GST credit to the instant asset write off scheme, amongst others.
Step 5: Understanding the tax benefits of buying a vehicle for your small business
Business owned vehicles
As a business owner, if the vehicle is owned by you, leased or under a hire purchase agreement you will be able to claim car related expenses including:
- Petrol and oil
- Lease payments
- Repairs and servicing
- Interest on the vehicle loan
If you occasionally use the car for personal use, i.e., to go to the grocery store generally there are no problems with this aside from a fringe benefits tax implication.
What is the instant asset write off laws?
The instant asset write-off scheme has been extended till mid-2023. This government scheme allows small businesses to write off a business asset expense (e.g., vehicle purchase) up to a limit of $150,000 per asset. For more information on this scheme visit the Australian Taxation Office.
Personally owned vehicles and tax deductions
If you decide to buy a vehicle for your small business in your own name, you can still claim tax deductions for the kilometres travelled and expenses incurred when the car is being used for business purposes. A simple logbook available from most newsagents is a great way to keep a record of your personal and business travel. There are a number of ways to claim business car expenses depending on if you are a sole trader or operating as a company or trust, or as a partnership.
If you plan to keep a logbook you will need to keep a detailed record of each trip including the start and end date, start/end and total kilometres travelled and the reason for your journey. To calculate your business usage, you take the km’s travelled for business purposes and divide it by the total distance travelled for both personal and business, then multiply by 100. You will also need to add up your total car expenses for the financial year and multiply them by your business use percentage.
Cents per kilometre
With this method you will need to multiply the total business kilometres travelled in that financial year by the ATO rate. For the 2022-23 financial year, it is 78 cents per km. This method allows you to claim up to a maximum of 5,000 business km per each year.
Actual cost method
The actual cost method is based on actual receipts of all business-related vehicle expenses. At the end of the financial year, you will be able to claim a percentage of the actual costs related to business use. Be sure to keep clear records as to when the car is used for business and when it is used for personal if you use it for both. In these instances, you would multiply the total costs by the business use percentage.
With any tax deduction, it is always best to consult a licensed accountant prior to making any decisions.
If you’re considering buying a vehicle for your small business, the first thing you need to decide is if the car will be purchased in your personal name or your business name. It is important to speak with a qualified accountant regarding what option is best for you.
To find out more about the business car loans available to you, how much you can borrow and your expected repayments, contact the team at Dynamoney today.