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Buying a car done right

Whether or not to buy a motor vehicle is not always a straightforward decision. There are many factors to consider before making the decision such as financing, interest payments, ownership (company or personal), salary packaging etc. But sometimes, it just comes down to wanting a nice new car. No matter what your motivation, some careful consideration can save you a lot of money.

Good market conditions

The high Australian dollar means that the cost of imported vehicles has fallen substantially, deflating prices across the vehicle market. Additionally, low interest rates mean that you can lock in an attractive interest rate on motor vehicle financing.

Even if you currently have a  vehicle financed over 3 – 5 years, now could be a good time to upgrade. The highest interest and depreciation deductions are substantially exhausted during the first few years. It may be prudent to upgrade your vehicle during the final period to maximise your tax deductions and savings.
However, before trading in a financed car to take advantage of this strategy, you need to ensure that the proceeds from the sale or trade-in will cover the payout figure on the remaining financed amount. Otherwise, you may have to fund any shortfall.

Compare cost and benefits

Apart from the fact that you might just want a new car, your decision to purchase a vehicle should be determined by weighing up the costs against the expected benefits. These may include increased efficiencies, elimination of high repair costs on old vehicles, better fuel economy and larger tax deductions. Relevant costs will include the capital outlay, the cost of servicing the financing arrangement and the lost opportunity to make other investment decisions.

Helping with cash flow

If the vehicle is for business use, you may find it attractive to reduce non-deductible personal debts such as your home loan with the proceeds of your trade-in, and take out finance for the full purchase price. This will maximise your tax deductible debts. Alternatively, consider purchasing a late model second hand vehicle as opposed to purchasing a brand new one to assist with your cash flow, especially if it will meet your business requirements.

Determining ownership

This decision is not as straight forward as you might imagine. You need to carefully consider whether your business entity (e.g. a company or a trust) should own the vehicle and provide it to you as part of your remuneration or whether you should own it personally.

Owned by a business: Salary packaging options may be available with car purchases.  Where it is provided to an employee for private use, it will generally be subject to Fringe Benefits Tax. FBT can be avoided if the employee makes regular after-tax contributions to their employer.  This ensures that the overall provision of the car remains tax effective, and is generally used where an employee’s taxable income is below the top marginal tax rate. As expected, there are lots of options so we recommend you consult Saward Dawson.

Owned in your name: If you choose to own it personally, the car will not be subject to FBT. You can claim a deduction for the business portion of your car expenses in your personal tax return.

Financing

When financing a motor vehicle, you need to consider your capacity to make repayments. There are many finance options available including hire purchase or novated lease, just to mention two. Depending on your choice of finance, there are GST and income tax implications to be considered.
The options are many and a little bit of homework can potentially save you a lot of money. Saward Dawson is able to help you choose the best options to suit your circumstances.

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