In Episode 2 of the Foolish Fridays series, I, The Wise Accountant (@hivewise_au) shed light on a common yet often misunderstood tax trap: purchasing a luxury car through your business and using it for personal travel. While this might seem like a savvy move, it can lead to significant tax liabilities, particularly concerning Fringe Benefits Tax (FBT).
Understanding Fringe Benefits Tax (FBT)
FBT is a tax employers pay on certain benefits they provide to their employees or associates, including the use of a company car for personal purposes. In Australia, if a business-owned vehicle is available for an employee's private use, it is considered a fringe benefit, and the employer is liable to pay FBT. The FBT rate is currently 47%, and the taxable value of the benefit must be 'grossed up' to reflect the gross salary that would have to be earned to purchase the benefit from after-tax income.
The Luxury Car Tax (LCT) Factor
In addition to FBT, businesses purchasing high-value vehicles may also be subject to the Luxury Car Tax (LCT). LCT is a tax on cars with a value above a certain threshold, which for the 2024-25 financial year is $89,332 for fuel-efficient vehicles. This tax further increases the cost of owning a luxury vehicle through your business.
Real-World Example
I, The Wise Accountant illustrate this with a real-life scenario, demonstrating how the combination of the car's purchase price, FBT, and LCT can result in substantial additional expenses. This example underscores the importance of understanding the tax consequences before making such purchases through your business.
Key Takeaways
- Personal Use Equals Fringe Benefit: Using a company-owned luxury car for personal travel triggers FBT obligations.
- Significant Additional Costs: The combined impact of FBT and LCT can add a considerable amount to the total cost of the vehicle.
- Seek Professional Advice: Before purchasing a luxury car through your business, consult with a tax professional to understand the full financial implications.
To gain a deeper insight into this topic and avoid costly mistakes, watch the full video here: Understanding Luxury Car Tax for Businesses.
Should you require professional accounting services in Australia, please do not hesitate to contact us.
