Beware of selling the vehicle you already claimed on tax!

Dummy Blog Post 3

Many small businesses gratefully accepted the tax break offered where you could claim the total cost of your new vehicle in one year. What happens, though, when you sell the vehicle, and what should you consider and plan for before exchanging vehicles?

When you sell a vehicle you use in your business, you need to record the trade-in or sale proceeds. 

How this transaction is recorded will depend on how the purchase and depreciation of your vehicle has been treated.

  1. Depreciated
    If the vehicle is depreciated, the proceeds are accounted for directly against the value remaining on the depreciation schedule.
  1. Written off/100% Depreciated
    The sale proceeds are treated as income, effectively at 100%.

As a result, many small businesses purchased a work car in the past 24 months and claimed 100% of the depreciation deduction they are entitled.

This process creates an up-front tax benefit but leaves you with a sting in the tail when you dispose of the vehicle. The proceeds will effectively increase your business income in the year where you trade the vehicle in or sell it.

The income will be offset by the cost of the new vehicle you purchase, particularly when purchased before 30 June 2023, because you can still access the Temporary Full Expensing rules and claim the cost in full.

The impact is that many small businesses expect another tax break when the next car is purchased. However, this won’t occur due to the requirement to account for the first car’s sale proceeds.

For example:

In FY2020, you purchased a new work utility vehicle for $35,000 and claimed a $35,000 tax deduction.

In FY2022, you traded in that utility vehicle for $20,000 and purchased a new utility vehicle for $35,000.

You will recognise the proceeds of $20,000 and still claim a deduction for the $35,000 vehicle; however, the net deduction is only $15,000.

As a result, if your business is budgeting for a $35,000 deduction on the basis that you are buying a new vehicle, you will be caught out when the tax is prepared, and you only receive a $15,000 deduction.

Remember, though, that this situation arises only as a result of the current Temporary Full Expensing measures, which currently end on 30 June 2023.

If you read this and want to talk about the implications and plans for your business vehicle fleet, I’d love to hear from you. Book a time to work with me now.