32 – Tax deductible cars

Introduction

Cars are one of the biggest outlays faced by financial planners and by clients. For most the car, or the cars, is the second biggest outlay they incur after housing. Yes, that’s right. Most people spend more on cars than they do on super. We have seen this time and time again. Its almost always irrational, and many a pensioner seriously regrets the brand new hire purchase car contract signed thirty years ago. If only they knew.

You need to talk to your clients about cars. Can they spend less and salary sacrifice more to super? Can they be a one car family? Can they buy a second hand car? Can they defer the trade up another year or two? Can they take the train to work? Can they ride a bike when the weather permits? Can they share a care? Uber? Walk?

Most clients (and financial planners) spend too much on cars and you will do them a great favor if you inject some rationality into their car costs equation and counsel them down a model or two.

You can read more about Dover’s views on cars at: The Assumption of the Cars and Your client’s second biggest living cost

The tax side of things

We have written at length on this topic elsewhere so we can be short here:

  1. cars should be owned by employer entities and provided to employees as concessionally taxed fringe benefits
  2. there is no limit on the number of deductible employee cars
  3. think about second hand cars
  4. the rules work even for low income earners and
  5. the luxury car tax rules limit the amount that can be tax deducted

You can read more about the tax side of things here: HR Block’s Claiming Car Travel.

What about your employees?

Employees are often required to use their car for work. They do not get paid extra. Its part of the deal.

At one rural financial planning practice the manager routinely used her car for the daily banking, to deliver documents and for completing the numerous small tasks that present in a busy day. She did not keep a log book but was very comfortable that total annual work kilometres were well over 5,000 a year. Her car cost her $50,000 to buy, second hand.

The good news is she could claim 12% of $50,000, ie $6,000, as an unsubstantiated car deduction in her annual income tax return.

Her marginal tax rate was about 40%, so this put $2,400 cash in her purse, every year.

On learning of this, she decided to use the extra $2,400 cash to salary sacrifice an extra $4,000 a year to super. That triggered an extra 15% tax in her SMSF, ie $600, but she was left better off by $3,400 a year, overall.

Practice tip

Create a PDF of this page and send it to every client or potential client who has an employee who uses a car for work.

Your clients will thank you, and in the long run it will all come back to you.

The Dover Group