GETTING VALUE
from your van A trade vehicle is often one of the major business assets plumbers buy, so it pays to think about how to maximise the tax deductions. AUTHOR: BRETT CROMBIE, STRAIGHT EDGE ACCOUNTING
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epreciation is the main tax deduction, so this article starts with that. Next, it covers some other common tax deductions for work vehicles. Finally, it looks at how trade business owners can manage their vehicles in a way that maximises profits.
What is depreciation? Depreciation is an expense—but, as it doesn’t involve cash changing hands, it can be tricky to understand. The idea behind depreciation is that assets owned by the business have a limited useful life and will eventually need replacing. Therefore, each year the business should record an expense to show the ‘using up’ of the business’s assets and to reduce the accounting ‘book value’ of those assets. Because depreciation is not a cash expense, it is recorded by your accountant as a journal entry to the accounts at the end of the tax period. Depreciation expenses can quite considerably reduce the tax to pay, especially for pricey assets like vehicles.
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Depreciation rates are published by Inland Revenue (IR) and there are different rates for all kinds of assets.
Example You buy a van for $40,000 and look up the depreciation rates on the IR website, which shows the rate for ‘Motor Vehicles – Light Goods’ is 30%. Using this rate you can now work out how much of a tax deduction you can get each year for the van.
VEHICLE COST
$40,000
Tax deduction in year 1
$12,000
Book value of the van after year 1
$28,000
Tax deduction in year 2
$8,400
Book value of the van after year 2
$19,600
Tax deduction in year 3
$5,880
Book value of the van after year 3
$13,720
By claiming depreciation, you reduce your business’s taxable profit, meaning you pay less tax. Given the current company income tax rate of 28%, a deduction of $12,000 results in $3,360 less tax to pay. No doubt there are some tradies out there who forget to claim depreciation, or just don’t know about it, so end up paying far more tax than they need to.
What if I buy the van on finance? If you’ve used vehicle finance to buy the van, you can claim the depreciation expense plus some other finance company expenses. Interest: The finance company will be charging you interest on the money you have borrowed to buy the van. This is a tax deductible expense. Fees: The finance company will also charge administration fees. Usually there is a loan setup fee, a monthly administration fee and a fee to make any changes to the loan term. These are all tax deductible expenses.
