PSI and Immediate W/off of Vehicle

Question

Hi there, I hope this question is appropriate. We have a construction company. The income is Personal services income and doesn’t pass any of the tests. The company bought a Toyota Hilux double cab recently for the business. My question is as follows:

Is this company entitled to claim the instant asset write on the vehicle. The ATO state that PSI deductions include depreciation of income-producing assets.

However, it also states that non allowable PSI deductions include deductions that employee wouldn’t be entitled to (they wouldn’t be entitled to instant asset write off)

If it is allowable how does that work for attributed PSI and PAYG? I assume it is a PSI loss that the individual can claim in his own tax return? In that case, can any payments taken by the individual out of the company just then be expensed to the profit and loss and added back in the tax return and claim loss as above based on the instant asset write off.

Many thanks, John.


Answer

I am surprised you have a construction company and don’t pass PSI through the results test, but I will take your word for it. Your question shows a high level of understanding of the issue so I have directed my answer at that level.

Section 86-70 ITAA 1997 https://www.ato.gov.au/law/view/document?docid=PAC/19970038/86-70 discusses how a personal services income business can claim a car. More than one car that has some private use then you are in trouble but the Hilux is certainly ok.

86-70(1)
Section 86-60 does not stop a *personal services entity deducting a *car expense for a *car of which there is no *private use. Other cars

86-70(2)
Section 86-60 does not stop a *personal services entity deducting:

(a) a *car expense; or

(b) an amount of tax payable under the Fringe Benefits Tax Assessment Act 1986 for a *car fringe benefit;

for a *car of which there is *private use. However, there cannot be, at the same time, more than one car for which such deductions can arise in relation to gaining or producing the same individual’s *personal services income.

So you are allowed to claim car expenses when the income is PSI and that would include the depreciation or in your case immediate write off of the car.

To qualify for the immediate write off you have to be a small business and that you certainly are. https://www.ato.gov.au/law/view/document?docid=PAC/19970038/328-110 There is no exclusion for PSI. Consider that PSI is covered in sections 85 and 86. Section 328-235 effectively says that being caught as PSI will not stop you being considered a small business and thus allows depreciation (in your case you are looking at a depreciation rate of 100%) even of cars providing they are within the requirements of section 86-70 which is cut and pasted in above.

328-235(1)

Despite sections 85-10 and 86-60 , if you are a *small business entity for an income year you can deduct amounts for * depreciating assets under this Subdivision.

328-235(2)

However, you cannot deduct an amount for a * car under this Subdivision if, had you not been a *small business entity and chosen to use this Subdivision, sections 86-60 and 86-70 would have prevented you deducting an amount for it.

Of course the problem with immediate write off is it can create a loss and waste your tax free threshold. Sometimes it is better to just depreciate it over 8 years, you do have a choice but you have to treat all assets the same way. As you say, profits or losses in the company can flow out to your personal income tax return.

I am not too sure what you are saying about the profit and loss statement. If you have already paid yourself wages from the company you can choose to go into STP and cancel them but they really aren’t going to be a problem. Combined the wages and the immediate write off may create a loss in the company P&L that loss is then transferred into your tax return and offset against those very same wages so it all works out in the wash anyway. If you have paid PAYG withholding on the wages you received, when you do your tax return the excess that, in the end, did not need to be paid will be refunded.

Now I have no idea what your balance sheet looks like and you do have to be careful about not creating a debit loan account, wages may help you avoid this. You need your Accountant to look at this. Fortunately, you do not have to make the decision as to whether you will immediately write off the ute or not until the tax returns are done when you will have all the real figures to go by. You also have until the lodgement date of your tax returns to rectify and debit loan accounts.

Note any money you take out of the company has to be classified as a dividend, wages or repayment of money you have leant the company. Anything else and you risk entering the murky waters of Div 7A and will need professional advice. So it may be a good idea to not cancel the wages if the money has been drawn from the company.

In short:

Yes you do qualify for the immediate write off

It is a choice, there is a lot to consider but this does not have to happen until you do your tax return.

If it creates a loss that can go into your personal tax return to offset any other income.

If the loss is so great that your income drops below $23k you have wasted your tax free threshold, that cannot be carried forward.

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