Edition 23 - Financing Motor Vehicles

BOOKKEEPERS KNOWLEDGE BASE

Edition 23

FINANCING MOTOR VEHICLES

One of the most common decisions facing business is how to finance and account for the acquisition of a motor vehicle. There are numerous ways that can be used and each way can result in differing accounting, taxation and GST treatment.

Throw in the dilemma of the Motor Vehicle Depreciation Limit and you have the potential for over claiming depreciation (decline in value) and GST.

The objectives of this Knowledge Base are to: ? Consider a number of the more common means of financing the acquisition of a motor vehicle ? Look at the accounting and income tax connotations of using the various methods ? Look at the impact each form of financing has on claiming input tax credits, and ? Consider the Motor Vehicle Depreciation Limit and its impact on the purchase of a vehicle through the various financing regimes.

ACQUIRING A MOTOR VEHICLE

One of the most common questions asked in relation to motor vehicles is how should I go about purchasing a vehicle? While it may seem a relatively straightforward question, there are numerous ways of doing so and the decision can have vastly different outcomes for income tax purposes, GST and cash flow.

Some of the more common methods are: ? Outright Purchase, ? Lease, ? Hire Purchase, or ? Chattel Mortgage.

We will now consider each of these four methods and their differences.

Important Note: The following discussion does not consider a vehicle that exceeds the Motor Vehicle Depreciation Limit of $57 581 (2017/2018). The Motor Vehicle Depreciation Limit is considered later in this bulletin. We also are only considering the various methods as they relate to GST registered entities.

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The Motor Vehicle Depreciation Limit should not be confused with the Luxury Car Tax Limit, even though in previous years they have been the same amount. Luxury Car Tax (LCT) applies when a vehicle is sold and exceeds the Luxury Car Tax limit of $65 094 (2017/2018). Luxury Car Tax is calculated, reported and paid to the ATO by car dealers and manufacturers, not by businesses purchasing a vehicle. For businesses purchasing a luxury car, the LCT is simply part of the purchase price. For a business able to use the Simpler BAS, only G1 (total sales), 1A (GST collected) and 1B (GST paid) are actually reported. G10 and G11 are not reported on, but for completeness sake we will continue with the details to demonstrate how the figures flow through to 1B on the BAS.

Outright Purchase The advantage of purchasing a vehicle outright, as opposed to financing the acquisition of the vehicle, is that there will be no ongoing costs of finance. This may not be such a big issue in these times of relatively low interest rates. It wasn't that long ago, however, that interest rates were in the high teens, which would have substantially increased the monthly payment and added significant cost to the overall purchase price. In contrast, however, the outright purchase of a vehicle can impact greatly on the cash resources of an entity when those funds may be better utilised elsewhere. It is far easier to obtain finance for the acquisition of a vehicle than it is for the acquisition of trading stock. Care should therefore be taken not to cripple the entity's cash flow if considering an outright purchase. When acquiring a vehicle, the costs involved in the actual purchase are usually the same. The components typically shown on a purchase invoice from a motor dealer are

? Deposit, ? Cost of Vehicle, ? Dealer Charges, ? Stamp duty, ? CTP Insurance, ? Registration, and ? GST. In addition, there may be some after market accessories purchased with the vehicle such as headlight and bonnet protectors, bull bars, towbars, seat covers, rust proofing, etc. These all add to the total price paid for the vehicle and must be accounted for in the transaction. Consider the following example:

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Example 1

Michael acquires outright a new Holden Barina and receives an invoice from the Dealer showing the following:

New Vehicle Price

15 900.00

Air Conditioning1 809.09

Roof Racks 310.00

Dealer Delivery Charge

695.45

Discount Given(1 717.27)

Subtotal16 997.27

On Road Costs:

Stamp Duty398.00

Registration Fee 245.00

CTP Insurance390.00

Vehicle Total18 030.27

GST in Price 1 699.73

Total Due19 730.00

(CTP Insurance includes $31.62 GST)

The first step in accounting for the acquisition is to identify the different components that make up the total purchase price of $19 730. We need to identify the asset cost, any deductible expenditure and finally the GST in the transaction.

In this instance, the asset cost is made up of a number of amounts. There is the first element cost of the asset being the vehicle itself as well as a number of second element costs being the after market accessories that have been purchased with the vehicle (Air conditioning & Roof Racks). While the air conditioning would attach to the vehicle, the roof racks could be held separately from the asset and hence need to be treated as a separate asset on an asset register. The dealer delivery charge and the discount given are in respect to the vehicle and hence add to and subtract from the first element cost of the vehicle. In addition, the Stamp Duty paid in respect of the vehicle is also considered an incidental cost of purchase and as such is attributed to the cost of the vehicle.

The assets acquired are therefore:

Vehicle

Cost of Vehicle Air Conditioning Dealer Delivery Charge Less Discount Stamp Duty Asset Cost

15 900.00 1 809.09 695.45 (1 717.27) 398.00 17 085.2

(Note that Stamp duty is outside of the scope of GST and has a tax code N-T.)

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2. Roof Racks

310.00

Items that are considered to be deductible expenditure include:

Registration fee

245.00

CTP Insurance

358.38

Total Expense603.38

(Note that the GST included in the CTP is deducted in order to determine the expense amount)

Finally, the GST is identified:

GST on Vehicle and Accessories (excluding stamp duty)

1699.73

GST on CTP Insurance

31.62

Total GST1731.35

Having identified the various costs that make up the transaction, the next step is to account for them within your system. Remember that in this instance the purchase has been made outright and as such the business will have written a cheque or transferred a cash sum for the amount of $19 730.

Account Asset ? Motor Vehicle GST Paid Asset ? Motor Vehicle Asset ? Roof Racks GST Paid Expense ? M/V Registration Expense ? M/V Insurance GST Paid Expense ? M/V Insurance Bank Account

Tax Code CAP N-T N-T CAP N-T N-T GST N-T N-T* N-T

Debit

Credit

16 687.27

1 668.73

398.00

310.00

31.00

245.00

316.20

31.62

42.18

19 730.00

(Where CAP=Taxable Capital purchase; GST=Taxable purchase; N-T=outside the scope of the GST system.)

* denotes the component of CTP Insurance outside the scope of GST. The GST paid has been shown in separate lines in the above journal entry to show how the GST components have been calculated.

Lease

Rather than choosing to acquire the car outright, the business may elect to finance the acquisition of the vehicle. The central issue that surrounds any form of financing, and how it is to be accounted for, is whether the person providing the asset under the finance arrangement is the legal owner of that asset. This issue goes to the heart of how the finance transaction is to be treated and is often the subject of Tax Office scrutiny. The Tax Office has warned taxpayers about the trap of claiming deductions for what appear to be lease payments when in fact the finance arrangement is a Hire

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Purchase or similar type of transaction. The only way to identify the difference is to read the terms and conditions of the finance agreement.

The Tax Office will consider a finance arrangement to be a lease when:

? There is no option to purchase the vehicle written into the agreement; and ? The residual value reflects a bona fide estimate of the vehicle's market value at termination.

If these two conditions are not met, the Tax Office considers the finance agreement to be a Hire Purchase or other instalment type agreement.

In effect, a leasing document identifies the owner of the vehicle as being the lessor with the lessee merely renting the vehicle from them for regular fixed instalments.

It is important to identify which method of finance is used to acquire the vehicle for the following reasons.

Under a leasing arrangement, the lease payments are a deductible amount to the extent the vehicle is used for income producing purposes, and the financed sum is not typically booked on the balance sheet of the entity.

Where the financing arrangement is not considered a lease, the vehicle is booked as an asset on the balance sheet and depreciated. In addition, the finance sum is booked as a liability and that component of each repayment that represents interest is expensed and the remaining principal reduces the liability.

Under a leasing arrangement, the first payment typically provides for the on road costs to be added to the amount of the regular payment that forms the acquisition of the vehicle.

Example 2

Assume that Michael from Example 1 finances, via a lease, the acquisition of the Barina. Assume also, that the repayments for the lease will be for a sum of $415.00 per month plus a residual sum after 3 years of $6 000. Assume the on road costs remain the same i.e. Stamp duty $398.00, Registration $245.00 and CTP Insurance of $390.00 including $31.62 GST.

Accounting for the lease is relatively straightforward. The first payment will be for a sum of $1 448 being the regular monthly sum of $415.00 together with the on road costs totalling $1 033. The regular monthly lease payment will also attract a stamp duty component that is embedded in the amount and can be readily identified from the leasing documentation. We will assume this amount to be $5.00. This stamp duty amount is a cost of borrowing, is deductible but does not attract GST. The remainder of the sum is subject to GST, and one eleventh of the regular repayment may be claimed as an input tax credit. Therefore, of our remaining monthly repayment being $410.00, the GST included in this amount is $37.27.

As the lessee is not the owner of the vehicle, the tax invoice for the purchase of the vehicle would go to the leasing company who would deal with making the claim for any GST on the purchase

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