MartinCo highlight some common tax deductions that can help you as a business owner.
Multiple company cars
All business owners should optimise the tax treatment of their cars.
Business owners can typically achieve a level of tax deductibility for the running costs of multiple cars. To do this, the owner must be operating with a company or trust structure. The company or trust makes a car available to the owner for private use. There is no limit to the number of cars that can be made available for this purpose.
Because the car is being used for private purposes, it constitutes a fringe benefit being paid by the employer (that is, the company or trust) to the employee (that is, the owner). As a result, the company or trust must pay fringe benefits tax. To reduce the fringe benefit tax payable by the employer (which is the highest tax bracket 47%), the employee should reimburse the employer with the portion of car expenses used for private purpose during a FBT year. The amount of fringe benefits tax (reimbursement) varies according to each situation. The amount of tax payable (reimbursement) is a direct function of the purchase price of the car (where more expensive cars give rise to a higher fringe benefits tax payment (reimbursement)) and an inverse function of the distance that the car travels during the fringe benefits tax year (where the further that the car is driven, the less fringe benefits tax (reimbursement) is payable).
Because the company or trust pays fringe benefits tax, the company or trust may also claim a tax deduction for the running costs of the car. Once again, these costs include things like petrol, insurance, registration, mechanical repairs and depreciation.
So, the company or trust simultaneously pays fringe benefits tax on the second and subsequent car while also claiming a deduction for the running costs of that car. Many running costs increase the further a car is driven. Conversely, the further the car drives, the lower the FBT payable.
Putting these two things together, in situations where a car drives 15,000 km a year or more, the deductions available for the costs come to more than offset the FBT payable, and the owner achieves tax deductibility for up to 75% of the running costs of the second or subsequent car.
In Australia, there is an upper limit on the value of a car for which a tax deduction can be claimed. That limit is known as the ‘luxury car limit’ and is currently set at just over $63,184 ($75,375 for certain fuel efficient cars). This means if a person pays more than $63,184 for a car, they can only depreciate $63,184 and the excess cannot be depreciated. Similarly, if the purchaser is registered for GST, they can only claim the first $6,300 of GST paid as an input tax credit.
The full purchase price of a car can be depreciated even when that car is bought second-hand. The luxury car limit applies to the actual purchase price paid by the owner or the entity. Therefore, if the owner pays $63,184 for a second-hand car, the full purchase price of $63,184 can be depreciated over the working life of that car.
In practice, this often means that an owner who buys a late-model second-hand European car gets to fully depreciate the entire price of the car that would have cost considerably more than $63,184 had it been bought brand-new. And what is an extra year or two and 20,000 kms on the clock when it comes to cars in this price-bracket? You just miss out on the new car smell.
Overseas and extended domestic travel
Where an employee is required to travel for work purposes the employer can pay a tax-free travel allowance to cover the travel costs. Where a business owner is using a practice trust, the practice trust is an employer for these purposes. This means that the practice trust can make a tax-free payment to the financial planner whenever the financial planner needs to travel interstate or overseas for work purposes.
The idea is that the employer reimburses the employee for costs incurred due to the travel. The ATO has published what they refer to as reasonable amounts of costs related to travelling for work purposes. Provided that the amount paid to the employee is within that reasonable amount, the owner does not need to substantiate the costs associated with the travel. The business owner merely needs to be able to prove that they were in a particular place for a particular purpose.
The business can then pay them what is commonly known as an unsubstantiated travel allowance. As that name suggests, the amount of the allowance does not need to be substantiated by documents such as receipts for accommodation. Provided that the owner can prove that he or she travelled and that the travel was work-related, the allowance can be paid.
The reasonable amount payable as an unsubstantiated travel allowance is defined by the ATO each year. The amount payable varies according to the salary level of the employee. For domestic travel, you can find the amount of unsubstantiated travel allowance payable for each of the major cities in Australia here: TD 2016/13.
Once again, the business owner does not need to substantiate the amount of money that they have spent in a particular city to claim the unsubstantiated travel allowance. They need only to be able to prove that they were there for a work purpose.
These are the limits for payments that do not require substantiation. If an employee incurs actual expenses that exceed these limits, then the employee can be reimbursed for the full amount of the expenses paid. Once again, whether or not to practice can claim a tax deduction for these expenses is a function of whether or not the employee needed to be in that place at that time for a purpose related to their practice.
Costs such as the airfares are also deductible provided, once again, that the primary purpose of the trip was work related. Airfares must be substantiated and the amount that can be claimed is limited to the actual airfare paid.