50% Business Tax Break – Will it be of real benefit to your business?

A 50% tax break on a new car makes that new car sound like a bargain; it’s a very tempting offer. It also sounds like a great idea to reduce tax for small business owners. But when considering taking the government up on their offer, you really need to think about the real cost of the new car. Any new assets for your business can be a significant cost to your business, so buying one needs to be a purely business decision.

Any small business with a turnover of less than $2 million per annum is eligible for this 50% tax break. This is a tax break, not a refund, rebate or tax offset. It’s a deduction to reduce the assessable income of your business. So you don’t end up with a refund of half the money put back in your bank account compliments of the government. As a deduction to your assessable income it becomes a very useful tool to reduce tax. However you still need to have the money to buy the car, you also still have to afford running and maintaining the car. Ask yourself whether you can afford that extra ongoing cost now.

It’s not just new cars, eligible assets of $1,000 or more are covered as long as they are new, tangible, depreciating assets like vans, trucks and other business vehicles, computer hardware, tools & furniture. It can also cover investments into existing assets such as substantial improvements or additions. (Repairs aren’t eligible.) You claim the tax break in the income tax return for the year you first use the asset or have it installed ready for use if you meet the conditions for that income year.

If you were going to buy a new depreciating asset in the new year, then bringing that purchase forward is not a problem. The problem lies in businesses buying new depreciating assets that they don’t need. If you have equipment that does the job and are only buying due to the tax break really think about whether you are truly better off.

For example if you buy a new car of $33, 000, in the first year your repayments would be around $8220 based on 9% interest, if eligible you will get the GST of $3000 back. You may also be eligible for a depreciation allowance saving you $1125 in tax (based on Prime rate at 12.5%) The 50% tax break will also be a reduction in tax of approximately $4500 (based on a tax rate of 30%) Therefore in the first year the purchase of your new vehicle may be cash flow positive of $405 for the year. However in the ongoing years your repayments would continue and after depreciation you would be out of pocket by per year for the following four years.&160; If you decided to buy a second hand car for $16,500 in the first year your repayments would be around $4110 if eligible you would be able to claim GST of $1500 and depreciation at 12.5% $562.50, but there is no tax break and you would be out of pocket around $2452.50. However the ongoing costs would be around $3547.50 on a yearly basis. This amount is half the amount in repayments going forward than the brand new car. So although the tax break is tempting in the first year of owning your brand new car, you need to ask yourself whether the cost in repayments in the years after that is sustainable and whether the cost is worth it to the business.

Mango Financial Services are not practising accountants, for more information please contact your accountant so they can look at your business circumstances. Please note that this example is based on certain assumptions.

Please also see the Australian Tax Office Website for more information www.ato.gov.au

General Advice Warning

Mango Financial Services Pty Ltd has not taken into account any particular persons objectives, financial situation or needs.  Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs.  We recommend investors obtain financial advice specific to their situation before making any financial investment or insurance decision.