Is depreciating a vehicle mandatory?

[Douglas Bailey]

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I’m a sole trader.

In April 2018 I purchased a business vehicle for $64k and depreciated it as follows: 15% in 18/19 and then 30% each year after. By the time I got to the 20/21 FY it was wholly written down to $0 via depreciation. And then I sold it for $50k. So in simple terms, I recorded a $50,000 profit from the car. (Note: I didn’t buy a new business vehicle in that same tax year.)

Then in Sep 2021 I purchased a business vehicle for $79,000. It’s April 2022 and I could sell it today for $79k. (There are none of these vehicles available for the next 6 months and those arriving in 6 months are $6k more.) I.e. it’s just not depreciating as vehicles have in the past.

So my question is, do I have to depreciate the vehicle? If the $150,000 instant asset write-off scheme is still in place and I’d be depreciating it to $0. But when I sell it, I’ll have a big chunk of profit again. It creates some big peaks and troughs.

PS: Don’t worry about log books, business usage, GST Limits, I’ve got all that sorted.

Thanks,
Douglas

[Paul – FS Concierge]

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Interesting post Douglas.

I wonder id @jamesmillar could chip in with an answer?

Cheers
Paul

[James Millar]

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Hi Doug

In limited cases you can opt out of temporary full expensing on an asset by asset basis but ONLY if your business is NOT using simplified depreciation for other assets. Given how concessional the simplified depreciation regime is – it is generally better to use it which means you WOULD NOT be able to opt out. So you need to look at bigger picture issues in terms of other fixed assets you have and what you may buy in coming years before making this choice.

If you buy and sell within one year it would closely net off (remember with most vehicles they are subject to a depreciation cap). If you buy and sell over different financial years that you may creative some distorted taxable results. This is why accountants normally run one depreciation schedule for accounting purposes (which better matches the useful life of the asset) and a separate tax depreciation schedule to maximise write offs. It makes the financials look better and is the more correct way of accounting for depreciation.

Worth also keeping in mind that banks will generally add back depreciation and interest in their loan assessment (if you are concerned about that issue). Just make sure you label depreciation expenses clearly in your profit loss otherwise it will impact your borrowing capacity.

Best of luck

• This reply was modified 1 year, 11 months ago by James Millar.

Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900

[Douglas Bailey]

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Thanks @jamesmillar. I don’t see your response here but I got an email notification with what you said.
Cheers.

[James Millar]

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looks like it was deleted by was no spam or links so let me check with Paul to see if he can reinstate

Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900

[Paul – FS Concierge]

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Hi @jamesmillar and @douglas-bailey,

I have no idea about how that happened but was able to track it down and restore the post.

Once again James, thank you for your contributions.

It’s a strange world when asset values are going up instead of down eh?

Cheers
Paul

[James Millar]

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Thanks Paul.

Even better – the gain you make on a car above its cost is tax free. Cars are excluded from CGT under Sect 118.5 of the 97 Act. http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.5.html

Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900

[DJH]

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James Millar wrote:

Thanks Paul.

Even better – the gain you make on a car above its cost is tax free. Cars are excluded from CGT under Sect 118.5 of the 97 Act. http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.5.html

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Paul – but is in a CGT event if a business that has depreciated a car sells it? I can’t see how that would be a tax free sale that you have suggested in this email.

[Paul – FS Concierge]

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DJH wrote:

Paul – but is in a CGT event if a business that has depreciated a car sells it? I can’t see how that would be a tax free sale that you have suggested in this email.

Hi @djh

@jamesmillar provided the advice, not me.

James is an (awesome) Accountant and member here at Flying Solo of impeccable standing.

All that said, there are never guarantees, only pointers or cues to be had on any Forum.

It is only when you pay an Accountant for advice that you receive the protection the law provides.

Cheers
~Paul

[James Millar]

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DJH wrote:

James Millar wrote:

Thanks Paul.

Even better – the gain you make on a car above its cost is tax free. Cars are excluded from CGT under Sect 118.5 of the 97 Act. http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.5.html

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Paul – but is in a CGT event if a business that has depreciated a car sells it? I can’t see how that would be a tax free sale that you have suggested in this email.

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To clarify that for you – the car is only effectively untaxed as a CGT event if it has not been used as a depreciable asset.

If you have been depreciating the gain will be effectively taxed under depreciation provisions as a balancing adjustment (standard income) or reduction in pool balance.

So its only a free car for a car that is an investment.

Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900

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