Q. I operate as a sole trader and my business made a loss for the first three years but is now running at a profit. It grossed $54,000 over the past four quarters with expenses totalling $40,000.
I use a private vehicle which isn't suitable for work. It has a business use of 85 to 90 per cent. I am looking to buy a new vehicle for between $35,000 to $40,000. My old vehicle is worth up to $4000 as a trade-in.
The business had been registered for GST but my accountant advised me to deregister as I my income was so low. In the June quarter, the business was not registered for GST.
As a result of business cash flow, money saved from previous work and help from family, I have $80,000 in the bank. This money is essentially doing nothing and there are no other major outlays necessary for the business. Overheads are low as the business is run from home.
Should I re-register for GST so that I can claim the credit for the GST on the purchase, and should I pay cash for the car or finance it? Is it better to pay interest on a loan so that I am eligible to claim the GST on the loan? If I purchased outright am I still eligible for the same claims regarding both the purchase price, including running costs?
A. If you re-register for GST you will have to stay in the system for at least five years. This is because if you claim GST on assets that cost between $5001 and $499,999, and then deregister, GST claimed on assets of less than five years old must be paid back to the ATO on the final BAS lodged.
If the turnover of your business is likely to reach the $75,000 threshold in the near future, which is when you would be forced to re-register for GST, it does make sense to re-register before buying the new vehicle. If this is not likely to happen you will need to weigh up the extra administration required over the next five years against the ability to claim up to 90 per cent of the GST included in the vehicle's purchase price.
The decision to finance the purchase or use cash may be taken out of your hands. As the business has only started producing a profit in the last 12 months you may not be offered finance. Buying the vehicle through a dealership could make this easier.
If you are able to finance the purchase the decision to use cash will depend on whether you have a better use for it. The golden rule for businesses is to use cash for private purposes and borrow for business. This means if you have a mortgage on your home, or major private expenses coming up, you should use cash for this and borrow for the vehicle.
If you do use finance what you can claim as an expense and for GST will depend on the type of finance used. If a lease is used you can claim the GST on the lease payments and the after-GST lease cost is claimed as an expense. If you use hire-purchase or get a principle and interest loan you claim the GST on the purchase price, and claim a tax deduction for depreciation of the vehicle and interest on the loan.
Questions on small business tax or other issues can be emailed to email@example.com
Tax for small business, a survival guide, by Max Newnham is available in bookstores and as an ebook.