The late Kerry Packer once said: “I am not evading tax in any way, shape or form. Now of course I am minimising my tax and if anybody in this country doesn’t minimise their tax they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra.”
With the many myths and misconceptions regarding tax regulations, we would like to decipher those more common tax-related confusions in this article:
Questions 1:
“If I put up a work sticker on my car, can I deduct 100% of my car expenses?”
Answer:
A simple answer is NO. Here are four methods that you can choose from to calculate car expenses-related tax deductions, and you can choose one that gives you the maximum deduction:
If you travel less than 5,000 business km per year:
- Cents per kilometre (maximum claim – 5,000 kms per year)
- Logbook method (this requires a logbook to be kept over a continuous 12 week period; the logbook can last for five years as long as it still represents continued use of the car).
If you travel more than 5,000 business km per year, you can use these methods:
- 12% of original value
- One-third of actual expenses
- Logbook method
Thus, it does not matter if the car is heavily displayed with your business logo, the tax deductions is based on the kilometres travelled for business purposes. Here are what can be considered as business purposes:
- Attending meetings
- Running business errands
Take note that travelling from home to work is not deductible.
The logbook method is usually preferable if you do use your car extensively for work. For those of you who would like to find out more, come speak to us to determine what method suits you best.
Question 2:
“I’m thinking of getting a car, should I lease, hire purchase or Chattel mortgage?”
Answer:
Each of the purchase option has its advantages, and we could spend a fair bit of time to analyse them. Ultimately, it is about personal preference. In terms of tax, Chattel mortgage and hire purchase are treated similarly. Some agreements that say “lease” are actually hire purchase upon reading the detail.
Here, we break it down for you in a brief matrix:
| Lease | Hire Purchase or Chattel Mortgage |
|
| Ownership | Not you | You |
| Tax deductibility | The full lease payment | Interest component of the repayments and depreciation of the car |
| GST | 1/11th of the lease payments multiplied by business use | Business use of the GST on the purchase price |
| Complexity of accounting | Simple | Complex |
With the current economic horizon, obtaining financing can be difficult but it is still preferable than paying cash.
Question 3:
“I’m looking to start a business, what structure should I have?”
Answer:
The response to this question is to consider the various factors in deciding which structure to adopt, mainly:
- Income tax
- GST
- capital gains tax
- stamp duty etc
Taking the wrong choice could burn a deep hole in your coffers.
We would like to present some important points to help get you started, since this article is not able to extensively cover the many tax implications.
- The sole trader structure is usually not suited for the long term, especially in today’s litigious environment. To be a sole trader, you would have a personal Australian Business Number, and in some cases, a business name. Usually, when the business is more established and getting a continuing stream of income, the sole trader structure should be reviewed.
- A way to plan your tax would be to consider setting up a Family Trusts, as it allows children of any age to receive tax-free income. Keep in mind that the amount of income a child below 18 can receive is limited, but at least it keeps the money in your pocket.
- Think about involving a company somewhere in the structure to provide asset protection. This can be in the form of a trustee of a trust. This helps to protect your personal assets from creditors.
- In some cases, forming a company could provide more problems than solution in terms of a structure, especially with the more complex accounting requirements, the various tax treatments, CGT and stamp duty which might present more complications.
- You might want to consider partnerships if there are two or more individuals or families involved in the business or investments. Other effective structures could be unit trusts, or hybrid trusts.
Getting your tax structuring right provides huge tax benefits (both in terms of capital gains tax and income tax), asset protection and can even improve your chances of getting bank finance. Hence, we strongly suggest thorough planning is considered before starting the business.