Going from Sole Trader to Company, What to do With the Cars?

Question

Hi

We have recently restructured the business from a sole trader to a company (shareholder of new company is a discretionary trust) I had a question in relation to the motor vehicles currently owned under the sole trader. It appears that the roll over relief will not be available as the ultimate economic owner is not the same (company is owned by trustee of family trust).

I am wondering how to handle the motor vehicles moving forward. Currently written down to nil in the sole trader but are still worth a considerable amount of money. They will be used in the business (now trading in a company) by the directors. Should we consider paying all running costs through the company and potentially charging the company an amount for their use? Also how does that work for FBT as company does not own them.

The sole trader has ceased trading but I assume when the vehicles are eventually sold they will be a balancing amount and assessable income to sole trade? Or is it assessable now as the sole trader has stopped using them.

Many thanks, John.


Answer

That is the exciting thing about cars owned by a sole trader. The balancing adjustment does not come into effect until they are sold even though the car might no longer be used for business purposes at all. The more private use of the car the less of the sale price that is assessable. The catch here is that once the sole trader ceases to be in business ie no longer registered for GST then GST may have to be paid back depending on the adjustment periods since purchase. For items costing between $5,000 and $500,000 there are 5 adjustment periods. Adjustment periods are 12 months but you don’t even start to count these years until after the end of the first financial year when you purchased the car so it may be close to 6 years. For this reason you may decide to sell the vehicles to the company and cop the tax and GST on the selling price but get a corresponding deduction for the purchase by the company. This would make the GST just an out going to you but an incoming to the company.

If you decide to keep the vehicles in the sole trader but want the company to pay the expenses, you are right it can’t claim for the vehicles because it does not “hold” them. Though “holding” them would include leasing them from you so that is another consideration. It would even allow the sole tradership to continue to be registered for GST just a change in that it is simply a leasing enterprise.

Alternatively, the individual directors can continue to “hold” the vehicles personally and use them in his or her capacity as a director in relation to the company’s business. This may trigger paying back some GST claimed on the purchase, when the sole trader de registers, but will not trigger any sort of assessable income for a notional sale. The idea would be to keep a log book. The company could reimburse the director for the portion of the vehicle expenses that relate to working for the company. The company would then be allowed to claim a tax deduction for those expenses and the GST back on them. This method will not trigger FBT.

If you keep a log book anyway FBT is not a concern whether the cars are owned by you personally or the company. If owned by you personally and the company simply reimburses the percentage of the expense that represents the business use then there is no fringe benefit. If the vehicle is owned by the company then there is a fringe benefit for the non-business percentage in the log book. But this is best dealt with by an employee contribution to cancel out any FBT liability. This basically gives the same tax outcome ongoing whether owned personally or by the company. The only wriggle room would be if some how the statutory method* gives a better tax result. This is only available in the company. Further, it is quite possible that the company owning the cars will give you a better outcome for GST ie not having to pay the GST back.

So much depends on the amounts and your circumstances. I am sorry that I can only give you the relevant rules. There is so much to consider here including your overall tax position. Ultimately you are going to have to run any decision past your Accountant. I would start by considering the company buying the cars off the directors. In a plan vanilla situation this would give you the best outcome.

Further reading https://bantacs.com.au/Jblog/the-25k-immediate-writeoff-clever-trick/#more-201

*Statutory method – I didn’t want to break the flow of what I was saying to explain so will do it here. The statutory method is an arbitrary method of calculating the fringe benefit. Instead of doing it on the basis of actual costs it can be on the basis of 20% of the cost of the vehicle. This is usually only a benefit if there is very little business use of the car. The point I am trying to make above is that you only have this option if the car is owned by the company not by you personally. So crunch the numbers on this too if there is very little business use.

Note I am assuming you are not caught by PSI otherwise you may have difficulty claiming two cars in the company that both have some private use.

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