The best time to sell your business vehicle (or any asset)

A common misconception I always hear about, is people thinking the best time to buy a new vehicle, or finish up their asset spend is at the end of the financial year. It is a misconception! This mindset does make sense for corporates who have to spend their budgeted money that they need to spend each year so they get the same budget spend for the next financial year, but it doesn't make sense for small businesses and from a tax perspective!

Why?

When you sell a vehicle, you don't claim depreciation on that vehicle in the year that you sell it - and when you then buy a new vehicle to replace the old one, you only claim depreciation from the time the new vehicle was purchased. For example - say you want to trade in your car and you look to do this in October - from a tax perspective, you will claim depreciation on the new car value from October - March. In any other year where you didnt trade vehicles, you get to claim depreciation for the whole financial year.

Tax implications of selling assets

It’s easiest to show the tax cost of selling an asset by doing a worked example, so here’s what happens.

Back in 2018, purchased car for $20,000 + GST.

Over 4 years, up to end of financial year 2022, $12,000 depreciation has been claimed on the asset. It has a book value of $8,000 (ex GST).

In 2023, we decide to sell the car. We manage to sell the car for $12,000 incl GST.

First, there is GST to repay on the $12,000 income (being $1,565).

There is also a difference between the sale price of the car ($10,435) and the book value ($8,000). This difference is a gain on sale and in this situation would be $2,435. We pay tax on this gain which say at 28%, is going to cost $682.

Why do we pay tax on a gain on sale of a asset? Essentially in the time the asset is owned, we have claimed more depreciation than the asset actually devalued by. We therefore underpaid tax, so this accounting entry more or less squares that up.

Of the $12,000 sale price, Prosper would recommend to set aside $2,247 for GST and income tax.

If the car was sold for below book value (say $5,000), there would still be GST to pay on the sale price. The difference between book value and GST exclusive sale price would be a loss on sale, and is treated like an expense to the business (so more or less, you pay less tax).

If you would like to sell a business asset to yourself to own personally, that must be done at market value. In the case of vehicles to which this typically applies, a market valuation is needed (car yards can provide this in writing) and the vehicle gets sold out to you at that value. There is still GST to pay on the sale price like in the worked example above, and any gain or loss on sale tends to exist too depending on the car value at that time. The only difference is no money actually has to be exchanged between owner and company, and a book entry can record this transaction.

Selling your personal vehicle into your business

If you want to sell your personal vehicle into your business (or from your business to yourself), the IRD requires this is done at market value - and sadly, no - comparing your car to something similar on Trademe doesn’t cut the mustard.

You will need to get your vehicle valued by someone in the trade - I like to recommend clients go to a card yard, and they will do up a letter that details your vehicle, and what it’s current market value is. Sometimes they charge a small fee for this.

You can then use this value for your business to purchase the asset - simple as that! There are complexities with how much GST can be claimed for sole traders who use business vehicles for personal use, so make sure to get advice if this is the situation you’re in. For companies, you may need to make adjustments for fringe benefit tax at the end of the year if you use the vehicle for personal use too, so make sure to seek advice if the asset will be partially used for personal trips too!

If you have purchased the car through a private sale - you can still claim GST! This is captured under the ‘second-hand goods’ rules in New Zealand- just make sure you keep good accounting records to enable this claim.

Disclaimer: this is general information only. Please reach out to Prosper Business for specific advice to your situation.