For many business owners, making informed decisions about vehicle purchases is important to maximizing tax deductions. One critical aspect is the car depreciation limit, which sets the maximum value that can be used to calculate depreciation deductions for passenger vehicles. For the 2024–2025 financial year, this limit has been updated—and understanding what it means for your business can help you plan your vehicle investments more effectively.
What Is the Car Depreciation Limit?
The car depreciation limit is essentially a cap imposed by the Australian Taxation Office (ATO) on the value of a passenger vehicle that can be used when calculating depreciation deductions. For the 2024–2025 financial year, this limit is set at $69,674. This means that if you purchase or lease a car for business or work use and its purchase price exceeds this amount, you can only claim depreciation in your tax return up to $69,674.
Key Points:
- Applies to Business or Work Use: The limit is relevant for vehicles used (or partly used) in carrying on a business or for work. If a vehicle is used for private purposes as well as for business/work, you can only claim the business/work portion. This will be further explained later in this blog.
- First Use or Lease Requirement: The limit applies to vehicles first used or leased during the 2024–2025 financial year.
- Passenger Vehicles Only: This threshold applies to passenger vehicles—not to commercial vehicles, trucks, or vehicles specifically designed for heavy-duty work (e.g., utes or vans that exceed certain load capacities – generally 1 tonne).
Why Does the Car Depreciation Limit Matter?
Understanding the car depreciation limit is essential for several reasons:
- Maximising Tax Deductions:
Only the amount up to $69,674 can be used to calculate depreciation deductions. If your car costs more, you won’t be able to claim the full purchase price as depreciation, so planning and budgeting are crucial. - GST Implications:
For GST-registered businesses, there is also a limit on the GST credit you can claim. Specifically, if your vehicle costs more than the car limit, the maximum GST credit is limited to one-eleventh of $69,674—that is, $6,334. This ensures that even if you purchase a high-priced vehicle, your GST claim is capped. We suggest you contact your business accountant if you wish to discuss GST claims on motor vehicles. - Impact on Depreciation Calculations:
The limit directly affects how you calculate depreciation using methods like the prime cost (straight-line) or diminishing value method. When the purchase price exceeds the threshold, the calculation is based on the capped amount irrespective of which method you use.
How Is the Limit Applied?
When it comes to applying the car depreciation limit in your tax calculations, consider the following:
- New vs. Used Vehicles:
The car limit applies whether the vehicle is new or second-hand. If your vehicle’s cost (after accounting for any GST input tax credits if you’re registered for GST) is higher than $69,674, only that amount will be used for calculating depreciation.
- Business and Personal Use:
If your vehicle is used partly for personal use, you must apportion the cost accordingly. For instance, if you use your car 80% for business, then your maximum depreciation claim is based on 80% of $69,674 which is $55,739 ($69,674 x 80%)
- Depreciation Methods:
You can claim depreciation either through the logbook method or, if eligible, by using the simplified cents per kilometre method (which, however, already bundles running costs, including depreciation, into its rate). For the logbook method, detailed records of expenses and business use are required to accurately apply the limit – please contact your business accountant who can advise accordingly.
Practical Example
Imagine you purchase a vehicle for business use at a price of $80,000 (including GST). Since $80,000 exceeds the car depreciation limit of $69,674, you can only claim depreciation on $69,674. If you use the car exclusively for business or work, your depreciation deductions will be calculated on this capped amount. However, if your car is used 70% for business/work and 30% for private use, then you would only be able to claim depreciation on 70% of $69,674 which is $48,772 ($69,674 x 70% = $48,772).
Similarly, for GST purposes, if you’re registered for GST, your maximum input tax credit would be calculated as one-eleventh of $69,674—approximately $6,334—regardless of whether the actual purchase price is higher. Please don’t hesitate to contact your financial advisor Melbourne if you have any questions about this example.
What Has Changed?
The car depreciation limit is periodically updated to reflect economic conditions and inflation. For the 2024–2025 financial year, the new limit of $69,674 represents an increase compared to previous years. This adjustment helps ensure that businesses purchasing vehicles can continue to receive tax benefits that are in line with current market values, though it still places a cap on the amount that can be depreciated for tax purposes. If you are wondering why there is a depreciation cost limit in the first place, we suspect it is because the ATO’s view is that one does not need an expensive car to do their job. For example, we suspect the ATO is of the view that a real estate agent does not need a Merc or BMW to do his or her job, he or she can do it in a much cheaper Kia (though we are sure that our real estate clients would beg to differ!)
Key Takeaways
- Limit Value: The maximum amount claimable for depreciation is $69,674 for the 2024–2025 financial year.
- GST Credit: For GST-registered businesses, the maximum GST credit is capped at one-eleventh of the car limit—approximately $6,334.
- Apportionment: Only the business/work-use portion of the vehicle’s cost is depreciable if the car is used for both private and business purposes.
- Compliance: Proper record-keeping (via logbooks or other accepted methods) is crucial to substantiate your claims with the ATO. Please contact your business accountant who can explain further on what records need to be kept.
- Planning: Knowing this limit can help in tax planning (end of financial year with your business accountant or financial advisor Melbourne) and ensuring you maximize available tax deductions when investing in business vehicles.
Final Thoughts
Staying up-to-date with tax thresholds like the car depreciation limit is important for any business that relies on vehicles. Not only does it impact your immediate tax deductions, but it also plays a role in your long-term asset planning and cash flow management which you may undertake with your financial advisor Melbourne. If you’re unsure about how the new limit affects your specific situation, consulting with a business accountant can ensure that you’re making the most of your available deductions while remaining compliant with the ATO.
