Firstly, let’s break down the transactions:
You sell your cobra to a financing coy for a profit. The issue is whether or not the tax man considers you are carrying on a business or a hobby as described below:
From the Taxman - ATO
Are you carrying on a business?
You must declare any income earned by your business. You can generally claim an immediate deduction for expenses that you necessarily incur in carrying on a business, provided these expenses are not of a private, domestic or capital nature. (Some capital expenses are deductible over time.)
To be able to claim business deductions you must be carrying on a business. If you aren’t carrying on a business, your activities may in fact be a hobby – in which case you don’t declare the income and you can’t claim deductions for expenses.
The courts have provided some guidelines to help determine whether a business exists or whether it is, in fact, a hobby. There are no hard and fast rules. The Tax Office looks at all the circumstances of a case in determining whether a business exists. Guidelines adopted by the courts include the following:
• Does your activity have a significant commercial purpose or character?
• Do you have more than just an intention to engage in business?
• Do you have a purpose of profit as well as a prospect of profit?
• Is there repetition and regularity to your activity?
• Is your activity of the same kind and carried on in a similar manner to businesses in your industry?
• Is your activity planned, organised and carried on in a business-like manner?
• What is the size, scale and permanency of your activity?
• Is your activity better described as a hobby, recreation or sporting activity?
Example: Carrying on a business
Wendy sells wooden toys from a retail outlet. Her outlet is open the same hours as other retail outlets. She advertises in the Yellow Pages as well as regional toy magazines. She sells to clients within her region and to people who have seen her advertisement. She sells her toys at a price that enables her to make a profit. Wendy would normally be considered to be carrying on a business.
Example: Conducting a hobby
Tchen makes wooden toys at home. He works about six hours a week and sells the toys only to his family and friends. He intends the activity to remain small and is happy if all he does is cover his costs. Tchen would be considered to have a hobby. As such, he would not include the amounts he received in his income tax return. Consequently, he cannot claim any expenditure he incurred in relation to his hobby against any other income he earns.
On balance you are probably carrying on a hobby from what you have described but you need to go through the bullet points above and consider how many of them are applicable to your situation.
If you are carrying on a business you will need to declare the profit from the sale in your tax return and pay tax as well as register for an ABN! There will be an audit trail with this purchase as the finance coy will most likely not pay cash. So , be warned if you accidentally forget to declare the income.
Secondly, will the finance coy be comfortable with this arrangement? From their point of view the issue would be security over the asset in case of default. Too high a price for your cobra may decline them from offering finance. How are they/you going to determine a price? They may not like the fact that a cobra is a ICV with a very limited market so they may deem the value to be far less than you would want.
Thirdly, assuming the finance coy agrees to your price you will lose legal ownership of your cobra. So any modifications etc may need to be approved by the lease coy plus it’s no longer yours…
Fourthly, FBT.
Do you have a high % on your log book or are you basing your FBT on km traveled. A high sale price for your cobra will magnify the FBT applicable to it which will come out of your salary sacrificed pocket. If your say a sales rep with a high % log book then the effect will be relatively small but if you cannot do more than 25,000km a year in your cobra then FBT will hit hard Eg for a cobra valued at $65000 that traveled between 15,000 to 24,999km a year the FBT rate is 20% or $13,000. So any profit on the sale will be quickly used up, especially if the cobra is not your daily driver.
To me the real issue is not so much making a profit on sale but the FBT consequences of the arrangement which depending on your circumstances may erode your profit on sale very quickly.
Hope that helps
BTW, dreaming of financing the cobra project…….. surely one can dream of better things!
Any accountants out there?
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