Most small business owners don’t know what business vehicle depreciation is, let alone how to calculate it. Considering the deduction can lead to some serious tax savings, it’s important you understand what you’re entitled to.
Admittedly, vehicle depreciation can be a complicated, jargon-laden subject. This simple guide explains it.
What is business vehicle depreciation?
A business vehicle declines in value over time thanks to wear and tear. Depreciation, or decline in value, is the cost of the vehicle spread over its effective life. Any business owner who uses a vehicle as part of their commercial operation is entitled to claim back the cost as a tax deduction.
How do I claim it?
Depending on your eligibility, you can choose to claim business vehicle depreciation using either general depreciation or simplified depreciation rules. Some points to consider when making a depreciation claim include:
- The cost of the vehicle
- The depreciation rule, or method of depreciation
- The effective life of the vehicle
- The luxury car limit
Simplified depreciation is only available to businesses that have an annual turnover of less than $2 million. How this rule applies to your business vehicle’s depreciation will depend on the cost of your vehicle.
Instant asset write-off for vehicles under $20,000
If your business vehicle cost less than $20,000 – the current instant asset write-off threshold – you can immediately claim the full value back as a tax deduction in the same year you purchased it.
For example, if John – a business owner operating a small driver-training academy – purchased a company car for $19,999, he could claim back the full amount, reducing his taxable income by $19,999.
It is worth noting that the current threshold ends on 30 June 2018.
Pooled assets for vehicles over $20,000
If you buy a vehicle that falls outside the instant asset write-off threshold, you can still deduct it, but accelerated depreciation rules won’t apply. Under simplified depreciation rules, you would ‘pool’ an expensive vehicle into a small business asset pool and claim:
- A 15% deduction in the year you bought it
- A 30% deduction each year after the first year
Alternatively, you can use the ATO’s general depreciation rules to work out how much you can claim for vehicles over the threshold.
General depreciation rules calculate depreciation amounts you can claim based on the life of the asset and the method of calculation. Under this rule, you can claim deductions of your business vehicle using one of two methods:
- Prime cost: This method assumes the vehicle’s value declines uniformly – that is, depreciating by equal amounts each year
- Diminishing value: This method assumes that the vehicle’s value drops sharply in its early years, resulting in higher deductions soon after purchase that eventually taper off
To find out more about general depreciation rules, and how they apply to vehicle depreciation, check out this simple tax depreciation guide.
A business vehicle’s effective life
General depreciation rules require a determination of the effective life of a vehicle in order to calculate either prime cost or diminishing value methods. To work this out, you can use one of the following:
- ATO determination: A standardised rate as set out by the ATO and published annually in taxation rulings
- Self-assessed determination: A self-assessed estimate based on the features of the vehicle and the way it’s used
How you work this out will depend on your business type. For example, if your work vehicle is used to drive Uber customers around 60 hours a week, its useful life is probably closer to four years. In this scenario, you’d be better off performing a self-assessment over the standard eight-year effective life determination set out by the ATO.
The luxury car limit
Before you rush out to buy a new car, particularly one over the current write-off threshold, be aware of the ceiling value applied to higher-value vehicles. The ‘luxury car limit’ is set at $57,581 for the 2016-17 financial year – so while you’re free to buy a Ferrari F12 for a cool $1 million for the daily drive to the post office, you’ll only be able to claim around one-twentieth of its cost against your taxable income.
While taking your accountant’s advice is always advised, it’s important you understand how business vehicle depreciation works. If you are keen to maximise your asset deductions this financial year, it’s worth investigating whether simplified or general depreciation rules apply to you.
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