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So you have purchased a new car and you are using Xero to monitor your finances and to prepare Tax Return. What are the important things you need to keep in mind to properly record the transaction and correctly account for GST?
Some of the important things you need to keep in mind with car purchase are as follows:
- Proper Xero recording so GST will appear on the Activity Statement
- GST Credit
- Car Limit
- BAS Preparation
On 1 January 2014, Faith Pty Ltd bought a car for $65,000 under a hire purchase arrangement, including GST. The contract says Faith Pty Ltd is liable to pay $940.00 per month for 60 months and a one time $21,000.00 payment after the last instalment.
Proper Xero Recording:
Usually cars are bought under a hire purchase arrangement. Here are the steps to record the car purchase in Xero:
- Set up a Manual Journal by following these simple steps:
- Hover your mouse to “Adviser” tab and click “Manual Journals”
- Click New Journal and enter the details of the purchase. Make sure you record the Asset, Liability, Interest and GST components properly. You should get an advise from your accountant or tax agent on how to split up items as to the proper value of the asset and liability including any finance costs associated with the purchase. Basically:
- You need to record the cost of the car taking into consideration the GST and the Car Limit as per ATO ruling. In this case:
- You need to identify the Unexpired Interest portion. This is calculated as; Total Payments to be made minus Car Cost including GST:
- You have to spit between the current and non current portion of the liability. As a rule of thumb, the Current portion is the next 12 months and the remainder should be recorded as Non Current.
Completing BAS in Xero : GST Credit and Car Limit
According to ATO:
If you use a motor vehicle solely in carrying on your business and you’re registered for GST, you’re generally entitled to claim a GST credit for the GST included in the price of the vehicle, provided you have a tax invoice. You must include the amount you paid for the motor vehicle at G10 (capital purchases) on your activity statement.
If you use a motor vehicle partly in carrying on your business, you’re generally entitled to claim a partial GST credit based on how much you use the motor vehicle in carrying on your business. You must include only the proportion of the cost of the motor vehicle that relates to business use at G10 on your activity statement.
In this scenario let us assume that the car was purchased solely for business purposes. Therefore, you can claim a GST credit in full as appearing in the tax invoice subject to the car limit as per ATO ruling.
Car Limit on Car Purchase
There are special rules you need to apply when you purchase a car for more than the car limit. The GST credit limit on car purchase for 2013-2014 financial year is $5,224. Therefore the car in our example, with a value of $65,000 will not claim GST of $5,909 but only $5,224. You will then enter $5,224 on 1B (GST on Purchases) on your BAS return.
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About Ian Edward Kho:
Ian Edward Kho, CPA, is an online accountant and a Xero Certified Adviser who renders cloud accounting services to Individuals, Companies and SMSFs in Australia. Follow him on Twitter and Google+