How do I save tax on my trade vehicle?
Updated: Nov 8, 2021
A trade vehicle is often one of the main business assets tradies buy, so it pays to think on how to maximise the tax savings.
Depreciation is the main tax saving, so this article starts with that. Next it covers some other common tax questions to do with work vehicles. Finally it looks at how tradies can treat their vehicles in a way that maximises profits.
1. What is depreciation?
Depreciation is an expense but it does not involve cash changing hands, so 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 the 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 sometimes reduce the tax to pay quite considerably, especially for large purchases like vehicles.
The depreciation rates are published by IRD. There are different rates for all kinds of assets.
Let’s take an example. If you buy a Hiace for $35,000, the first thing is to look up the rates and you’ll see that 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.
Tax deduction in year 1
Book value of the Hiace after year 1
Tax deduction in year 2
Book value of the Hiace after year 2
Tax deduction in year 3
Book value of Have after year 3
By claiming depreciation you reduce your businesses taxable profit, meaning you pay less tax. Some tradies forget to claim depreciation or just don’t know about it, so end up paying far more tax than they need to!
2. How do I maximise the tax savings if I buy the van on finance?
If you’ve used vehicle finance to buy the Hiace, you can claim depreciation expense as well as some other expenses.
Interest – The finance company will be charging you interest on the money you have borrowed to buy the Hiace. 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.
Another way to look at is that the actual re-payments of the loan (the ‘principal’) cannot be deducted for tax, but everything else can be.
3. Are you sweating it?
Let’s leave aside tax for a moment and look at vehicles from a business and profit point of view.
While having a reliable, tidy work vehicle is important, some tradies take this a bit far. Upgrading to the latest, flashest work vehicle all the time is a sure way to suck profits out of the business.
Even though the tax deductions of a new expensive vehicle are going to be higher than for an old vehicle, this shouldn’t be the reason to go out and do an upgrade.
In my experience the most profitable tradies tend to be the ones who ‘sweat’ their vehicle assets. They keep their work vehicles maintained and tidy so they can use them for as long as possible. That way they can take more profit out of the business or invest that money into things that will help the business grow.
If you’re looking to buy a work vehicle, or unsure if you’re currently claiming all the tax savings you could be, go ahead and flick me an email or book in a free phone call and run me through it.
Trade vehicle images in this article are courtesy of Camco Industries