In this blog we will consider the tax implications involved in disposing of a motor vehicle both privately and within a business. Disposal does not only include the sale of a motor vehicle, but also trading in the vehicle or that vehicle being written off as part of an insurance claim.
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Generally, if a motor vehicle is sold by an individual and it has not been used for business purposes, this transaction is regarded as a private sale and is exempt from capital gains tax and income tax in the hands of the taxpayer.
These rules change when the motor vehicle has been used completely or partially for business-related purposes. When a business-related vehicle is disposed of in one of the above scenarios, it must be included in the assessable income of the business.
On disposal a balancing adjustment will be made, whereby, the difference between the disposal value of the car and the written down value of the car is calculated. The written down value is the portion of the car that has not been depreciated by the time of disposal. This can be calculated with the assistance of your accountant.
The use of accelerated depreciation rules often creates an unexpected issue for businesses. For example, if a vehicle cost $40,000 and was written off completely under temporary full expensing, then tax must be paid on the entire sale value as the written down value would be $0 creating a much larger profit on sale than if it had only been partially depreciated.
Another thing to consider is whether GST is payable on the disposal. If your business is registered for GST, then the sale of a motor vehicle used for business-related purposes will likely be regarded as a taxable sale. GST will need to be calculated on the sale and remitted to the Australian Taxation Office. This will also be the case even if the motor vehicle was purchased prior to the introduction of GST, being 1st July 2000 and/or sold to a non-business individual.
Any taxable amounts or GST payable should only be calculated on the business use percentage of a vehicle. As an example, if the motor vehicle was only used for business-related purposes 80% of the time (as per a valid logbook), only 80% of the disposal value would be taxable and GST would be calculated on the same 80%. A balancing adjustment may also be required if the vehicles business use changed or ceased during the ownership period.
Further complications come when a motor vehicle that has been disposed of, was purchased above the luxury car tax limit. Further information regarding this can be found here or by consulting your accountant. Special rules also apply when disposing of a motor vehicle to an associate for under market value and disposal of motor vehicles by charities.
The team at Francis A Jones will be happy to assist you with any queries that you have regarding this matter.
Related blogs
Claiming motor vehicle expenses using logbook method
Tax consequences of buying a work vehicle
Author: Joanne Humphreys
Email: [email protected]
