One of the biggest investments in your lifetime is definitely a car loan. When you avail such a type of loan, you also need to pay a monthly interest amount during your regular instalments. This interest can add thousands of dollars to the actual price of your new vehicle. So, one of the questions that generally strikes us is whether this interest can be claimed as a deduction on the income tax return form? Well, this clause is governed by a number of factors. Therefore, before taking you through the various terms of car tax refund, let us understand what we mean in general by tax benefits.
Which Types of Loan Promise You Maximum Tax Benefits?
As defined in Wikipedia, “Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income”. Usually, three prominent loan types are eligible for tax rebate. This includes a home loan -- in which both the amounts paid toward principal and interest are eligible for tax deduction. Second is the education loan. However, in this case, only the interest paid toward loan repayment is eligible for deduction on your tax return form. Third comes the personal loan. Although many are unaware of its advantages, even this loan offers some tax benefits. So do not miss out on this aspect (which we shall discuss in the following paragraphs) and also learn how a personal loan can also be used to buy a vehicle. This shall be useful if you are planning to purchase new equipment or a car in the near future.
Now that you know which major loans are eligible for tax benefits, let us discuss a bit about another loan type, namely the car loan. Though this option offers you variable repayment options, one question that definitely pops is if you are eligible for a car loan tax deduction? The answer, thankfully, is ‘yes’. But it does come with a few considerations, depending again on the type of car loan you seek. Therefore, let us take you through its various aspects in the underlying sections.
Which Car Loan Type Is Best Suited For Car Tax Refund?
As you must already know, similar to most other loans, this secured loan offers a fixed repayment tenure and interest rate. A car loan, both for new and used vehicles, can be availed either for getting equipment for personal or business purposes. And this is where the difference lies -- depending on whether you are a salaried or self-employed individual. A car for personal use is classified as a luxury item. Therefore, in this scenario, where the buyer is a salaried employee, he cannot claim any tax benefit on his income tax form. However, if you are a self-employed individual or running a business, you can claim tax deduction on the interest or depreciation amount. According to Australian Taxation Office (ATO) Rules, a prospective loan applicant can choose from a gamut of financial solutions to finance vehicles. Be it for your business or for your employees, with proper homework, you save both money and time with the the ideal option.
The Various Options Available For Car Tax Refund
Let us guide you through the various financial options for a commercial vehicle loan and see how they can be used to avail car tax refund.
Also referred to as a bill of sale or equipment loan, a chattel mortgage is a loan agreement where finances are borrowed to buy heavy equipment or trucks for business purposes. It comes with certain advantages such as inclusion of balloon payment and tax deduction on the interest paid. Goods and service tax (GST) on the purchase price can also be claimed during income tax payment.
A hire purchase is also termed as an offer to hire. In this agreement, during the hire term, the financier owns the asset and the hirer pays monthly instalments. Post the completion of this period, the ownership of the asset is automatically transferred to the hirer. Even this agreement includes various positive sides such as application of ballooning option and tax deduction on the interest amount.
Car Finance Lease
In a car finance lease, the financier retains the title and the asset is leased to the borrower for a fixed tenure and agreed-upon rental amount. In this case, repayments are generally and fully eligible for tax deduction. Once the term ends, the financier usually offers the vehicle for sale at its residual value.
Work-related Car Expenses
Now, when you are filing your tax return form, it is essential to understand how you can improve your numbers and get back more of your tax. This is possible through deduction claims, expenses, and logbooks. Even if you are a salaried employee, you can claim your car expenses. These include any trip that you undertake for work-related issues such as travel between job sites, delivery or pick-up of supplies, being present in meetings or conferences. However, you cannot claim for travel between office and home, since this is considered to be a personal expense.
These deductions can be availed through two methods:
- Cents Per Kilometre
In this method, you are required to record the number of kilometres you travel in the financial year for work-related activities. However, the maximum limit eligible for car tax refund in this case is up to 5,000 km.
- Vehicle Logbook
If your expected kilometres exceed 5,000, you can go for a logbook. You need to ensure that the records cover a minimum of 12 weeks and are inclusive of all expenses such as percentage of business use, odometer readings, buying price, borrowed money and repayment amounts, fuel and oil costs.
Buying a Business Car
Another major tax benefit of car finance and purchasing a car for less than $20,000 is the small business government write off. Currently, small businesses can claim deductions for individual assets which cost less than $20,000. Therefore, if you buy a vehicle for less than $20,000 before June 2018 and register it as a business asset, you can claim car tax refund on the full amount. However, you do need to consider and record several factors such as frequency of car usage for business purposes, the driver, garage locations, and others.
What If I Opt For Personal Loan For Car Finance?
A personal loan can be availed for a variety of financing requirements – a holiday, education fees, a new car, used car, or renovation. Again, a personal loan is eligible for tax rebate if you are availing the finances for business purposes. For personal scenarios, it does not offer any form of tax benefit to customers. For example, if the personal loan availed is utilised for paying the margin money of your house or for any business asset such as a vehicle and if you are able to establish this requirement, then the interest paid can be claimed according to the specific purpose for which the finances have been used.
If you are claiming car tax refund, then understand your complete eligibility. If the ATO discovers bogus claims during auditing or lack of required proofs, then you might be subjected to hefty penalties. Therefore, whenever in doubt, it is always recommended to seek advice from your accountant.
Disclaimer: For detailed information on tax benefits and payments, please always seek advice from your accountant.