The car has a holy role in the psyche of many men. It says something about you, and about what you want to be. It’s a signal of your success…. It’s the Holy Grail. Or is it the Holy Grill?
This was brought back to me at a recent Dover CPD day when I was cornered and quizzed on how a financial planner should buy two new cars.
He was planning his and her matching white BMWs…. The BMW guy said they suit. Well, he would, wouldn’t he.
I did my best to negotiate it down a notch or two. A lesser model? A second hand dealer? Have you still got a home loan? All the usual thoughts. But as usual I failed. The cars would be bought brand spanking new and parked prominently everywhere possible.
Nothing was going to stop him, least of all financial logic.
It would help his business, he said. Who wants a financial planner with no money?
I surrendered. You cannot win an argument like this. You can just make it less expensive.
So I turned to tax. Who would own the cars? I asked. And how would the cars be paid for? He stopped, stumped, and stuttered he had not thought of that yet. Let me explain, I led.
Who should own the cars?
This bit is easy.
The adviser’s practice trust should own the cars, and provide them to the adviser and his wife under the car fringe benefits rules. The fringe benefits tax rules value cars on a concessional basis, and this means less tax is paid compared to otherwise if an employer provides a fully maintained car to an employee.
Multiple company cars
There is no limit on the number of cars able to be provided to an employee by an employer, and “employee” is defined to include most related persons including spouses, children, siblings and parents of the real employee. This means a spouse or other related person can use the car even though they are not a general law employee of the trust. They are deemed to be employees of the trust, and that is all that is needed.
You can read more about owning cars in a professional practice in chapter 4 of part 6 of the Dover Way, which can be accessed here: Multiple company cars.
And buying the car in an employer entity means the 10% GST is refunded in the next BAS.
How should the car be paid for?
The adviser said BMW Finance would provide lease finance for each car totalling $170,000, at just 3% interest. This sounded cheap, but was really expensive because the need for vendor finance reduced his bargaining power and meant he was paying more than he otherwise would have paid for the car, perhaps as much as an extra $10,000.
That’s expensive money.
But worse, it’s tax inefficient money. Every monthly payment includes a capital component, and the adviser had a home loan. He should have been paying back his expensive non-deductible home loan rather than his cheaper tax deductible car loan.
That’s even more expensive money.
The solution was to negotiate the price down to $160,000 and pay using a NAB line of credit at home loan rates. As a practical matter no principal would be paid back until his expensive non-deductible home loan was repaid, which was at least ten years away under the current repayment pattern.
The take away here is that most personal finance contracts, whether they be leases, chattel mortgages or hire purchase contracts are tax inefficient because they force the borrower to pay back deductible capital.
What about a second hand car?
Do you know Australians buy more Mercedes Benz than Fords? It’s true. They do. You can read about it here in an article by Mark Hawthorne in the SMH on 8 January 2016: Australians buy more Mercs than Fords, as luxury car sales surge.
Do you know the luxury car tax means there is no tax deduction for the cost of the car above $63,184 ($75,375 for a fuel efficient vehicle). This makes cars costing more than $63,184 very expensive pieces of machinery.
Do you know there is often a gap of more than 30% in the market value of a new car compared to a one year old car? You can read about it here: Drive away without the instant price drop.
Do you know that the Millionaire Next Door explains that the most common car owned by a self-made American millionaires is a second hand Mercedes Benz? You can read about it here: Secrets of the millionaire next door.
These are, of course, the articles to send clients when they say they are contemplating buying a new car. Or two.
Best of luck talking them out of it. The Assumption of the Cars is an unworldly force. Repentance is rare. Redemption is rarer. Reconcile yourself to the Consolation of the Tax.