While the 21/22 Federal Budget is still to be passed into law and action by Parliament, the wide acceptance of the measures should indicate it will pass both houses. The policies and measures in an annual budget are scheduled to come into effect after 1 July but businesses start taking advantage of the measures in regard to the purchase of new motor vehicles.
The Government is continuing with economic stimulus measures and in our field of interest, car loans, providing incentives for businesses to purchase new vehicles. At the heart of this incentive is temporary full expensing. This measure was first introduced this time around (it has been introduced at times in the past) in the delayed 20/21 budget in October.
But with so much else going in 2020 and early 2021, many business owners and operators may not have had the chance to seriously consider the benefits for their business and action new purchases. With EOFY approaching, now could be the time to swing into action.
Temporary Full Expensing Update
Temporary full expensing is an accelerated asset depreciation measure. The ‘temporary’ refers to the measure being in place for a limited time. In the current situation, it was originally in place until 30 June 2022 and has now been extended through to 30 June 2023.
Accelerated depreciation refers to being able to depreciate or write-off the purchase price of the asset, in this case, motor vehicles, faster than under normal tax rulings. That means, claiming a tax deduction for the business for the amount of the depreciation. Normal rulings allow depreciable assets to be written off/tax deduction claim as a small percentage of the price over several years.
Depreciable assets refer to assets such as cars and equipment which are purchased with a finance product that has depreciation as the tax-deductible component, such as car loans for sole traders. This differs from Leasing where the repayments are considered an operating expense and a tax-deductible.
Full expensing means business can claim the full purchase costs of these depreciable assets in full in the year of purchase. No need to wait years to claim the tax deduction of car purchases in small increments.
The incentive factor lies in the business being able to claim a larger tax deduction, thus reducing their tax obligation. Theoretically, giving businesses less to pay and therefore more to spend on employing more staff or investing in other equipment.
What’s the difference between temporary full expensing v Instant Asset Write-off?
This is probably where some confusion may arise. Instant Asset Write-off was introduced as part of the early rounds of stimulus measures in April 2020 and was picked up and promoted by pretty much anyone selling eligible assets as well as lenders. If you hadn’t heard of IAWO during 2020, it would be very surprising.
IAWO was limited to businesses with a certain level of turnover and to $150,000 in assets. In the October budget, IAWO was essentially superseded by temporary full expensing. They are both accelerated asset depreciation measures but the businesses and the asset value was expanded and increased with temporary full expensing.
What vehicles are eligible?
To be eligible as a business asset, a vehicle must be acquired for use in the business under ATO rulings. Subject to meeting ATO criteria, that may include passenger vehicles, utes, SUVs, vans, light commercials and other body types used in a business.
To be eligible for full expensing, the vehicles must be purchased and used in the business after 7.30 pm (AEDT) on October 6, 2020 (the time the Treasurer announced the Budget) and 30 June 2023.
For a business with aggregated turnover below $50m, the vehicles may be either new or used. For a business with a turnover in excess of $50m, only new vehicles are eligible. So that gives business owners a vast selection of vehicles to invest in and take advantage of the measure.
What businesses are eligible?
When first introduced, IAWO was limited to business with a smaller turnover. With temporary full expensing, that turnover was greatly increased to those with turnover less than $5 billion. A level that includes just about all businesses in Australia. Exceptions being the extremely large corporations.
So ABN holders, owner-operators, SMEs, family businesses, partnerships and larger pty ltd businesses can be eligible for the measure. Note the mention above in regard to turnover and new/used vehicles.
What Business Car Finance product is suitable?
Chattel Mortgage is seen as the most appropriate finance product for businesses purchasing vehicles and looking to claim the accelerated depreciation through temporary full expensing. This is a very versatile type of loan as it suits many purchases and many businesses that use the cash accounting method. And it attracts the lowest interest rate of the range of commercial finance products available. Refer to our commercial car finance rates comparison tool to see what your repayments may be for the vehicles you are looking to purchase.
Moving forward with purchase plans and business car finance
It appears that there is no limit on the number of new assets a business can invest in and use temporary full expensing. So you may look to acquire a single vehicle or replace an entire fleet. You may choose to purchase one vehicle in this financial year, ending 30 June 2021 and another in the next financial year.
If looking to purchase this year, you’ll need to have the vehicle operational in your business by 30 June. With that date fast approaching, speak with one of our Jade Car Loans consultants to arrange pre-approved finance so you’re set to sign when you get to the showroom to inspect.
Contact 1300 000 003 to discuss your motor lending requirements.
DISCLAIMER: IN REGARD TO MISREPRESENTATIONS AND ERRORS CONTAINED IN THE MATERIAL AS PRESENTED, LIABILITY IS NOT ACCEPTED. THE DETAILS AND CONTENT IS PROVIDED FOR CAR BUYERS AND INDIVIDUALS AND BUSINESS SEEKING FINANCE PURELY AS GENERAL INFORMATION. THIS IS NOT PROVIDED AS THE ONLY SOURCE OF FINANCIAL INFORMATION. ANYONE THAT CONSIDERS THAT NEED FINANCIAL ADVICE ABOUT THEIR SPECIFIC REQUIREMENTS SHOULD SEEK THEIR OWN FINANCIAL ADVISOR.