Behind the wheel

Navigating the finances of
car ownership

Tasmanian surgeon Dr Stephen Wilkinson is a closet car buff. He walks or runs to work most days to stay fit and to reduce his carbon footprint, and only clocks up around 3,000 km annually, so if you took a peek inside his garage you may get a surprise.

You’d find a Hummer that runs on biodiesel made from used cooking oil, a rare 1974 DeTomaso Pantera and a Nissan Skyline GTS, which he describes as “one of the most amazing performance vehicles ever released”.

“I inherited it from my son, who, unlike me, has matured. I use it if I have to travel between hospitals”, he says.

Regardless of what you choose to bang around town in — hard-wearing Hummer or humble Holden — car ownership has perks and pitfalls from a financial perspective.

We take a look under the bonnet at some of the nuts and bolts.

The price tag

It’s common for emotion to override commonsense when it comes to car ownership. Before you rush out and spend a fortune, it’s worth noting some of the negatives of luxury car ownership. 

For starters, unless you buy a unique sports car or collectable, it will quickly decline in value. As a rule of thumb, a car will usually only be worth around 50% of its purchase price after 3 years.

Darren Johns, principal adviser at Sydney financial services firm, Align Financial, notes, for instance, that a car that costs $150,000 will lose around $20,000 in value each year — so consider that cost of ownership over and above petrol, servicing and insurance.

“Before they spend a lot on a vehicle, I ask doctors if that’s a price they are prepared to pay”, he says. “Some say yes, which is fine as long as they go into it with open eyes.”

The amount you spend will also affect the level of tax relief you’ll be entitled to on a car used for work purposes, according to Jarrod Bramble, a Newcastle-based partner at accounting and financial services firm, Cutcher & Neale.

Tax effectiveness is reduced once the purchase price exceeds a luxury car limit assigned each year by the Australian Taxation Office. In the 2011–12 financial year, this limit was $57,466.

Once you exceed that limit, the maximum GST credit you can claim on the purchase of the car is up to one-eleventh of the limit.

According to Mr Bramble, if you bought a car for $150,000, for instance, you’d only be entitled to an input tax credit of up to $5,224, but when you sold the car you’d be liable to pay out one-eleventh of the full amount in GST if the disposal is a taxable sale.

Getting a loan

There are benefits to financing your vehicle using a balloon or residual repayment option, according to John Fara, a director at small business accounting firm, Fiducia Advisors. This option reduces your monthly repayment amount, which helps if you plan to change your vehicle frequently or the budget is a little tight, but it means you’ll have a balance payable at the end of the loan.

Mr Fara suggests that you check up-front for early payout costs, as these can sometimes come as a shock.

He also suggests you check to see if you’ll be charged late-payment interest or penalties.

Also, the ATO has maximum percentages that they will allow as balloons or residuals for tax purposes, Mr Fara says.

According to Mr Bramble, with a balloon or residual loan, it’s worth checking ahead of time how much will be left to pay at the end of the finance contract. If it’s higher than 50%, you may be left with negative equity in the car, which means when you sell it, the amount you receive won’t cover your loan.

Buy or lease?

Terry McMaster, of McMasters’ Accountants, solicitors and financial planners, says GST has taken away many of the advantages of leasing.

“We prefer clients to pay cash up-front for a car or borrow via a line of credit because it’s cheaper and more tax efficient”, he says.

According to Mr Fara, a finance lease is just another form of finance, so you are essentially buying the vehicle.

The advantage of a finance lease is that you can claim the entire repayment as a tax deduction, and budgeting is easier because the interest rate is fixed and repayments run for a fixed term (usually 3–5 years).

However, he notes that the interest paid will add to the overall cost of the vehicle.

Expense claims

There are four methods of claiming car costs: keeping a logbook to estimate the proportion of business use; or three fixed methods for claiming costs: cents per km, 12% of the car cost, or one-third of running costs.

According to Mr Fara, each method gives a different result, and you can choose the method that returns the most benefit from year to year.

A logbook of odometer records must be kept for 12 consecutive weeks with written evidence of all car expenses for the year to determine a business use percentage.

For doctors with two practices or who also work in another location such a hospital or university, their car may be considered a “tool of trade”, and this has significant tax benefits.

According to Mr McMaster, the trip from home to work each day would constitute a professional purpose if a doctor can show that they need to carry bulky medical equipment or potentially offensive or embarrassing items from home to their place of work.

He says doctors who operate their practice through a trust can also deduct the running costs of multiple cars under the car fringe benefits tax rules, even where there is no business use.

This means that any family member’s car can become partially tax-deductible. Mr McMaster says this method for calculating this deductible expense is known as the statutory formula, and is based on the total number of kilometres driven.