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Common Issues for Bookkeepers

 

Purchasing a Car

 
Many clients purchase a motor vehicle through their business. In this case, the cost of the car will be shown in the balance sheet as a non-current asset. However, the Income Tax Assessment Act 1997 (ITAA97) imposes a limit on how much depreciation can be claimed as a tax deduction and A New Tax System (Goods and Services Tax) Act 1999 (GST Act) also imposes a limit as to how much GST can be claimed back in respect of a luxury car. These issues are discussed below.
 
A car is defined in s 995-1 of ITAA97 to mean any motor vehicle except a motor cycle, utility truck or panel van with a carrying capacity of 1 tonne or more, or any other vehicle with a carrying capacity of nine or more passengers.
 

Purchase of a car costing $33,000

 
Initial Journal Entry
 
Assume that on 1 March 2011, Joe Bloggs, a sole trader, purchases a Honda Euro from City Honda at a cost of $33,000 including GST. Assume that he intends using the vehicle solely for business purposes.
 
The amount debited to the car account in the balance sheet includes the cost of the car, stamp duty and delivery charges but excludes registration and third party insurance. The bookkeeper will put through the following journal entry to record the purchase of the car.
 

DATE

PARTICULARS

POST REF

DEBIT

CREDIT

March 1 Car

GST receivable

 

30,000

3,000

(1/11th x $33,00)Cash at bank

 

33,000
(To record the purchase of a car by Joe Bloggs)

 

 
Depreciation Journal Entry
 
A car is considered a depreciating asset for both accounting and taxation purposes. A car purchased after 1 July 2007 has an effective life of eight years. This equates to a depreciation rate of 18.75% diminishing value. On 30 June 2011, the bookkeeper will put through the following journal entry to record depreciation for the 122 days from 1 March to 30 June 2011:
 

DATE

PARTICULARS

POST REF

DEBIT

CREDIT

June 30 Depreciation expense – car

 

1,880
Accumulated depreciation – Car 1,880
(To record depreciation on the Car for the 2011 financial year)

 

 

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Purchase of car costing $110,000

 
Initial Journal Entry
 
Refer back to the earlier example. This time, assume Joe purchases a Porsche Boxster for a cost of $110,000 including GST. The car is intended to be used solely for business purposes.
 
For GST purposes, an entity can claim back 100% if the input tax credit. However, as explained earlier, s69-10 of the GST Act imposes a luxury car limit.
 
In other words, if an entity that is registered for the GST purchases a car for use in its business, it can only claim back an input tax credit based on 1/11th of the purchase price up to the luxury car limit. For the year 2011 income year, the luxury car limit was $57,466.
 
As the cost of the car is in excess of the luxury car limit of $57,466, the maximum input tax credit that Joe is allowed to claim is $5,224 (i.e. 1/11th of $57,466), not $10,000 (i.e. 1/11th of $110,000)
 
The bookkeeper will put through the following journal entry to record the purchase of the car:
 

DATE PARTICULARS POST REF DEBIT CREDIT
March 1 Car
 
GST receivable
 
104,818
 
5,224
(1/11th x $57.009)Cash at bank

 

110,000
(To record the purchase of a car by Joe Bloggs)

 

 
Analysis
 
The GST receivable is debited for $5,224, which is the maximum input tax credit allowed under the GST Act for a car. Cash at bank is credited for $110,000. The remaining amount of $104,818 is debited to the cost of the car which appears as a non-current asset in the balance sheet.
 
If a car is purchased for more than the luxury car limit of $57,466, the ATO has advised that when completing the Business Activity Statement, only the car limit of $57,466 is included in Item G10, not the full cost of the car.
 
Hence Joe would only include an amount of $57,466 at Item G10 on the BAS. He would claim $5,224 as an input tax credit at Item 1B.
 
Depreciation Journal Entry
 
As explained earlier, according to s 40-230 of ITAA97, a depreciation car cost is placed on the depreciable amount of a car. For the 2011 income year, the depreciation car cost was $57,466.
 
In other words, if a car is shown in the balance sheet at $104,818, depreciation can only be claimed on $57,466, not $104,818. Any depreciation calculated in excess of the cost of $57,466 is not tax deductible.
 
On 30 June 2011, the bookkeeper will put through the following journal entry to record depreciation for the 122 days from 1 March 2011 to 30 June 2011.
 

DATE PARTICULARS POST REF DEBIT CREDIT
June 30 Depreciation expense – car

(deductible)

3,601
Depreciation expense – car(non-deductible)
 
Accumulated depreciation – Car
2,996 6,597
(To record depreciation on the Car for the 2006 financial year)

 

 
Analysis
 
The expense account entitled “depreciation expense – car (deductible)” of $3,601 is calculated as follows: 18.75% x $57,466 x 122/365 days x 100%. For taxation purposes, this is the amount which can be claimed as a tax deduction.
 
The debit to “depreciation expense – car (non-deductible)” represents the non-tax deductible depreciation component. This amount is calculated as follows 18.75% x $47,352 (i.e. $104,818 – $57,466) x 122/365 days. The credit to the “accumulated depreciation – car” is the total of these two amounts.
 
Private Use
 
In the second worked example above, Joe purchased a Porsche Boxster for $110,000 including GST. The car was intended to be used 100% for business purposes. As a result, Joe claimed 100% of the input tax credit (up to the luxury car limit of $57,466). In other words he claimed an input tax credit of $5,224 (being $57,466 x 1/11th x 100%).
 
However, if Joe intended using the car only 70% of the time for business use, the input tax would be further reduced to $3,659 (i.e. $5,224 x 70%).
 
The bookkeeper would put through the following journal entry to record the purchase of the car:
 

DATE PARTICULARS POST REF DEBIT CREDIT
March 1 Cash (balance)

 

106,341
GST receivable($5,182 x 70%)

 

Cash at bank

3,659 110,000
(To record the purchase of a Car by Joe Bloggs)

 

 
Analysis
 
It can be seen that when the GST receivable account is debited for only $3,659 (i.e. $5,224 x 70%), the excess is taken to the cost of the car. The car is shown in the balance sheet at $106,341. The cost of the car effectively includes the amount of the input tax credit that cannot be claimed in the BAS.
 
The ATO has advised then when completing the Business Activity Statement, only 70% of the car limit of $57,466 is included at Item G10. Only $3,659 would be reported at Item 1B.
 
On 30 June 2011, the bookkeeper will put through the following journal entry to record depreciation for the 122 days from 1 March 2011 to 30 June 2011:
 

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