New Car Tax Break

On 10 May 2011, the government proposed to introduce a $5,000 tax break for small businesses when a new car is purchased from 1 July 2012 (i.e. the 2012/13 financial year).  The tax break will allow small businesses to claim an immediate deduction of $5,000 in the year of purchase along with any applicable depreciation deduction on the residual (which is 15% in the first year and 30% in subsequent years). 

Example: A business owner purchases a new car for $33,960 (GST exclusive).  Under existing laws, the owner will receive a depreciation deduction of $5,094 in the first year and $8,660 in the second year (i.e. 15% and 30% decline in value respectively).  Under the new scheme, the business owner will be entitled to an immediate deduction of $5,000 plus applicable depreciation on the residual balance.  This amounts to a deduction of $9,344 in the first year and $7,385 in the second year.  In this example, the business owner is entitled to a deduction to almost half the value of the car over the first two financial years.      

The tax write-off effectively replaces the entrepreneurs’ tax offset (ETO) which was introduced in 2005 by the former coalition government to help small businesses become established.

Does the deduction reduce the amount that can be claimed as depreciation under Division 40?

Yes.  The deduction will reduce the value of the car which is claimed under Division 40.  As a result, an eligible taxpayer can still only claim up to 100% of the asset's cost.

Are assets acquired under a financing arrangement eligible for the deduction?

The entitlement to the tax break rests with the legal owner of the asset.  Motor Vehicles acquired under a loan facility or hire purchase are therefore eligible.  However, under a lease arrangement only lessors are eligible for the deduction. 

What is a small business entity?

A small business has turnover of less than $2 million a year.
Last Updated: 28-Dec-2011 05:03 PM