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Old 01-13-2004, 04:24   #1 (permalink)
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Lightbulb Get a tax deduction & GST-Free for restoring your car!

Consider this if you have or wish to buy a an old streeter but the 'ol girl is in need of a good restoration.

There is a smart way to restore it GST-Free and also get a tax deduction. All you need is a business operating in either a trust or a company structure.(the reasons why you need a trust or company because you need the car to be transfered to a entity that is seperate from yourself)

Consider this example. My old '82 model XE Fairmont Ghia sedan 351 clevo is in need of a good restoration, which I own in my own name. Worth between $1,200 and $2,700 market value (per redbook) say for arguments sake market value is $2,000.

Example is based on the following extra assumptions:

1. I decide to transfer the car to a company, I control & operate for $2,000, which the company pays to ‘me’. (I chose a company as an example as the tax benefit is easier to calculate as it is limited to 30%, instead of a trust where the tax benefit can vary from 0% to 48.5%)

2. Transfer duty is declared and pay to the local RTA for the transfer, to officialise the transation based on $2,000 (I will ignore effects of the duty on the business as it is minor in this case and only overcomplicates the example)

3. The company is registered for GST.

4. The car is used 100% for private use.

5. Annual kilometres travelled are less than 15,000.

6. Car will be subject to Fringe Benefits Tax (FBT)

7. Car is held for a full (FBT) year ie. 1 April to 30 March

8. Costs incurred during the year include the following (including GST):

Panel work & paint say $6,600
Engine rebuild (including some undisclosed fast bits) say $5,500
Rego & insurance say $1,100 (rego has no GST but assume it does for eg)
Fuel used during year say $55 per week thus $660 per year
Tyres say $660

Total including GST $14,520

Ok. Now for the workings.

First calculate FBT on the car, which is bugger all. You would use the statutory method because you have no business use and the cost base of the car is low.

FBT is limited a maximum of 26% of the cost of the car. Then gross-up using FBT gross-up formula then times by the maximum tax rate of 48.5%

Thus $2,000 x 0.26 = $520
$520 x 1.9417 = $1,010
$1,010 x 0.485 = $490

FBT payable to the government is $490, but wait you can get a tax deduction on this also.

Cost to company is therefore:

Total expenses above $14,520
Less: GST claimable $ 1,320
Expenses net of GST $13,200
Plus Depreciation on car $ 375
($2,000 x 18.75)
Plus FBT on car above $ 490
Total costs before tax deduction $14,065
Less: Tax deduction @ 30% $ 4,220
Net cost to company $ 9,845

Thus saving to what it would have cost you as opposed to the company is:

Cost that you would have paid $14,520
Cost to company $ 9,845
Saving $ 4,675

Plus you get $2,000 in your own name (which is tax-free to you), not the companies!

And remember the FBT next year will still be based on $2,000 (ie. $490) as the above costs on the car are treated as expenses not capital improvements which effect the cost base for FBT purposes.

All you need to do is maintain spending on vehicle greater than the cost of the FBT to be tax effective.

The greatest downside is that if you sell the vehicle later, the business will need to pay tax on the profit of the vehicle (not tax-free like it would be in your own name) so this would need to carefully considered.

Any comments or questions feel free :)

Cheers
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Old 01-13-2004, 09:13   #2 (permalink)
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Re: Get a tax deduction & GST-Free for restoring your car!

so what if you where to sell the car back to yourself for $2000, would that rid the tax payable on the profit - therefore allowing you to sell the car at a later date (for more than $2000) tax free?
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Old 01-13-2004, 14:56   #3 (permalink)
 
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Re: Get a tax deduction & GST-Free for restoring your car!

Yep that works
Other way is to just novate lease the vehicle and all expenses are classed as personal contributions that eliminate your FBT liability
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Old 01-13-2004, 17:05   #4 (permalink)
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Re: Get a tax deduction & GST-Free for restoring your car!

How would you go about leasing a 1971 Falcon (eg) though? Surely lease companies wouldn't do it.
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Old 01-13-2004, 17:51   #5 (permalink)
 
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Re: Get a tax deduction & GST-Free for restoring your car!

They will lease you whatever you want....its your asset....
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Old 01-13-2004, 18:03   #6 (permalink)
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Re: Get a tax deduction & GST-Free for restoring your car!

Now you tell me............
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Old 01-13-2004, 19:01   #7 (permalink)
 
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Re: Get a tax deduction & GST-Free for restoring your car!

Opps lol
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Old 01-13-2004, 19:08   #8 (permalink)
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Re: Get a tax deduction & GST-Free for restoring your car!

You can only novate lease a car that is going to be less then or equal to 5 years old at the end of the lease period
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Old 01-13-2004, 19:27   #9 (permalink)
 
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Re: Get a tax deduction & GST-Free for restoring your car!

Untrue
Can speak from experience
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Old 01-13-2004, 19:55   #10 (permalink)
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Re: Get a tax deduction & GST-Free for restoring your car!

Quote:
Originally Posted by XWGT
Yep that works
Other way is to just novate lease the vehicle and all expenses are classed as personal contributions that eliminate your FBT liability
You may be on to something here:

By novating the vehicle, the vehicle is still registered in your own name, and an agreement (called a novation agreement) is drawn up between yourself and the company, the company agreeing to pay your lease payments.

While the novation agreement is in place the car will become subject to FBT and the company will be able to claim a tax deduction and GST back for the lease payments, and on all the other costs I listed above (excluding depreciation as the vehicle would not be owned by the company).

But if you cancel your novation agreement with the company, all future expenses become yours and the company does not get the tax deduction or the GST claim, and you will therefore not be subject to FBT.

This seems to leave a window of oportunity for you to get a novation agreement in place with the company, collect the saving I listed above than cancel the novation agreement with the company before the end of the lease, payout the residual in your own name then sell the vehicle in your own name at a profit which will be tax-free.

Seems to good too be true and probably is. It may constitute a tax scheme by the Australian Tax Office, and would probably only be uncovered in an audit. I would be careful, timelyness would be the key, selling it straight after you payout the lease might seem like an obvious scheme waiting 6 months, 12 months or longer might not, its hard to make a call on these things sometimes, tax law is not always black & white more grey. Thing is, this is unusual as you usually don't make a profit on motor vehicles.

But there is another problem:

Quote:
Originally Posted by fordel
You can only novate lease a car that is going to be less then or equal to 5 years old at the end of the lease period
fordel has it covered thou, thou I have heard 7 years from own finance broker at work. If any one knows of others that who fiance greater than 7 years please let me know of the name.
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