Tax Implications: Vehicle & Equipment Finance

Overview of Tax & Finance

When you finance a vehicle or equipment for your business, you're not just getting an asset, you're entering a world of tax implications that can significantly impact your bottom line. Understanding how business finance interacts with tax law is crucial for making informed decisions.

The key difference: Deductions reduce your taxable income (saving you tax at your marginal rate), while GST credits give you back the 10% GST you've paid on business purchases. Both matter, but they work differently depending on your finance structure.

Depreciation & Deductions

Depreciation is how you claim the decline in value of your financed assets over time. It's not a cash expense, but it reduces your taxable income each year.

Car Depreciation Limit

The ATO caps depreciation at $69,674 (2024-25) for passenger vehicles. This means even if you buy a $90,000 SUV for your business, you can only claim depreciation as if it cost $69,674.

Heavy Equipment: No Limits

Good news for tradies: vehicles over 1 tonne payload capacity (most dual-cab utes) and equipment like excavators have no depreciation cap. You can claim the full business portion.

Small Business Pooling

Small businesses (under $10m turnover) can pool assets costing under $20,000 into a general pool, simplifying depreciation to a flat 15% in year one, then 30% ongoing.

⚖️ Compliance Reminder: Keep detailed records of asset purchases, finance agreements, and depreciation calculations. The ATO may request these during reviews.

Instant Asset Write-Off & Incentives

The instant asset write-off lets eligible businesses immediately deduct the business portion of asset purchases instead of depreciating over years. The threshold and eligibility have changed frequently:

Loan vs Lease Tax Treatment

Your finance structure significantly impacts your tax position. Each option has different implications for GST, depreciation, and deductions:

Chattel Mortgage & Hire Purchase

• Claim GST credit upfront on the purchase price (if GST registered)
• Depreciate the asset over its effective life
• Deduct interest charges as incurred
• You own the asset from day one (shows on balance sheet)

Finance Lease

• Deduct lease payments as operating expenses
• Claim GST credits on each payment (1/11th of payment)
• No depreciation claims (you don't own the asset yet)
• Simpler accounting but may miss instant write-off opportunities

Operating Lease (Rental)

• Full lease payment deductible (subject to business use %)
• GST credits on each payment
• No asset on books, pure expense treatment
• Typically for short-term or specialist equipment

Balloon Payments & Residuals

A balloon payment reduces your regular repayments but creates a large final payment. Tax implications:

• Interest on the balloon amount is still deductible over the loan term
• The balloon doesn't affect depreciation claims
• At loan end: pay the balloon, refinance, or sell/trade the asset

Business Use Percentage

You can only claim deductions for the business portion of your financed asset. This requires keeping records to prove business use:

Logbook Method

Keep a logbook for 12 continuous weeks, recording:

• Date, start/end odometer readings for each trip
• Purpose of trip (business or private)
• Calculate business use percentage from the sample
• Valid for 5 years if circumstances don't change significantly

Reasonable Estimate Method

For assets other than cars, you can use a reasonable estimate based on:

• Diary records of use
• Invoice/job records showing asset deployment
• Nature of the asset (e.g., concrete mixer = likely 100% business)

⚖️ Compliance Reminder: The ATO closely scrutinizes high private-use claims on luxury vehicles. Be realistic and keep supporting evidence.

Tradies & Equipment

Different rules and opportunities apply depending on what you're financing:

Dual-Cab Utes

• Usually exempt from car limit if >1 tonne payload
• Private use generally doesn't trigger FBT if mainly for work
• Popular models: HiLux, Ranger, Triton, Navara, Colorado

Excavators & Heavy Machinery

• No depreciation cap (not a "car" for tax purposes)
• Often 100% business use (who takes an excavator shopping?)
• Consider finance lease if upgrading frequently
• Transport costs are also deductible

Trailers

• Separate asset from towing vehicle
• Usually 100% business use for work trailers
• Can qualify for instant write-off if under threshold

Tools of Trade

• Power tools, hand tools, measuring equipment
• Often pooled for simplified depreciation
• Sets costing under $20,000 may qualify for instant write-off
• Keep receipts, even for smaller purchases

End-of-Life & Disposal

When you sell, trade, or dispose of a financed asset, tax implications include:

Balancing Adjustments

Compare the sale price to the written-down value (original cost less depreciation claimed):

• Sale price higher = assessable income (you over-claimed depreciation)
• Sale price lower = additional deduction (asset declined more than claimed)
• Car limit applies: balancing adjustment capped at original car limit

GST on Sale

• If you claimed GST credits on purchase, you may owe GST on sale
• Private sale to non-GST registered buyer = no GST
• Trade-in to dealer = GST applies (1/11th of trade value)

Common Compliance Pitfalls

Avoid these common mistakes that trigger ATO attention:

Over-claiming Private Use

• Claiming 100% business use on family SUV raises red flags
• Keep honest records, the ATO has data-matching capabilities
• If audited, you'll need to prove your claims

Exceeding the Car Limit

• Luxury car depreciation capped regardless of actual cost
• Common error: claiming full depreciation on $100k+ vehicles
• Check if your vehicle qualifies for exemption (payload >1 tonne)

Poor Record Keeping

• No logbook = limited to 5,000km claim or actual receipts
• Lost receipts = lost deductions
• Digital records are acceptable, use apps like ATO myDeductions

Instant Write-Off Misuse

• Asset must be used/installed ready by June 30
• Ordering isn't enough, delivery and use required
• Business use percentage still applies
• Second-hand assets qualify but check the rules

⚖️ Compliance Reminder: The ATO uses sophisticated data matching. Your claims are compared against industry benchmarks. Unusual patterns trigger reviews. Stay within reasonable ranges for your industry.

Frequently Asked Questions