Rands Tax & Business Consultants

What are the implications when purchasing and selling cars used in businesses?

There is a depreciation cost limit for motor vehicles used in business. 

For example, what would be the GST and depreciation treatment for a car if you buy it for $100,000 in 2018 FY, use it solely for business, and then sell it in 2022 FY for $55,000?

There is a limit on the cost you can use to work out the GST and depreciation of passenger vehicles designed to carry a load of less than one tonne and fewer than nine passengers. the limit in 2008 FY was $57,581. Therefore, the amount of GST your business could claim on the car will be limited to $5,325, being one-eleventh of $57,581 as the car with regard to the cost that can be used for GST purposes, is limited to $57,581.

How will the depreciation cost limit affect the treatment of the sales proceeds received?

After claiming the GST input tax of $5,325 and taking into account the $57,581 as the cost of the car included in the small business asset pool, this will leave a non-depreciable cost for the car of $37,184. This non-depreciable cost equals 39.2% of the after GST cost of the car.

In the first year of buying the car, the business could claim 15% of $57,581. As the car will be in the small business asset pool the depreciation claim for each subsequent year will be 30%.

What would be the implication when you sell the car?

If you sell the car after four years for $55,000 you must include $5,000 of GST received on the BAS in the quarter that the vehicle is sold.

Under the small business asset pool rules the value received, relating to the depreciable cost of the asset, is used to decrease the value of the small business asset pool. Accordingly, $30,400 (being 60.8 % of $ 50,000) would be deducted from the value of the small business asset pool. If this results in the small business asset pool having a negative value, this value is shown as assessable income in that year.

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