How to decide if it’s good business to buy an asset
Should You Buy A New Car?
One of my clients came to me the other day with a question – should I buy a new car? It’s not a stupid question, accountants are known for saying things like ‘You’re going to get a tax bill, maybe you should buy a new car and reduce your tax’.
Right now we have the instant asset write-off so a new car (or digger or scaffolding or whatever) can be deducted against your tax all at once, this tax year instead of over the next few years at 20% a year.
You could be forgiven for thinking ‘this is a great deal, it’s almost like getting a free new car’.
It’s not though.
You might get a tax deduction all at once but you still have to spend the money to buy the car. So an $80,000 car gets you an $80,000 deduction (if you’re using the car 100% for work, less if you use it for personal travel too).
And an $80,000 tax deduction saves you much less than that in tax.
If you are trading as a company, the company’s tax rate is 25% so you’re $80,000 ute will save you $20,000 in tax. And you’ll have spent $80,000.
(Even if you finance the car and save your $20,000 in tax this year and pay a monthly payment for the vehicle, you’re not getting much of a gain, are you?)
So you don’t save money or improve your cash position by doing this.
You spend money on a new asset (car, ute, excavator) and you have some tax – so your new car is a bit cheaper than it would have been.
That’s really the benefit you get – your new asset (car, ute, most likely) is cheaper because of the tax deduction.
This is important – you’re not saving any money. You’re paying less tax (which accountants love and which vehicle salespeople and finance salespeople used to tempt you) but you’re spending money on an asset (probably a depreciating asset) you’re not saving money.
Money-wise you’ll be worse off.
So buying a new thing is still buying a new thing, it’s not being financially responsible.
It gets more complicated when leases or finance are involved, especially with bubble payments.
My client’s situation was this: Company ute, nearing 5 years old, monthly payment $600 or so, end of lease approaching, $18,000 to pay; car worth a bit more, maybe $24,000. The vehicle has done 180,000 km and is in good condition.
Should he pay the car out with cash, refinance the balance and pay a similar monthly payment for another 3 years or sell it and buy a monthly payment of $800 or so?
On the surface that seems like a brand new car for only $200 a month more but it’s not, is it?
It’s $800 (or so) a month for a further 5 years then a bubble payment of 30% or so and the cycle starts again.
If he pays the balance out in cash, he has a good car and no monthly payments anymore.
So now he’s weighing up a new car (appealing) and an ongoing $800pm payment and a bubble payment in 5 yrs against paying the $18,000 out in cash soon and owning that car outright and no monthly payment. He’ll still own a 5 yr old Ford Ranger which is still a good car, for its purpose.
And he’ll have $500 a month extra profit to do what he wants with.
Even if he doesn’t pay the car out in full in another 2 or 3 years it is paid out and is still fine. And, he doesn’t owe $70k which means he can borrow more for a property investment he might like to do.
So, it’s not as simple as it seems.
The car (or other assets) still costs you money and you should weigh up the joy or benefit of the new thing against what else you could be doing with the money you spend on the asset.
Want help with this – give me a call (hyper link)
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