Indirect taxes
Car limit
The car limit is a yearly cap set by the ATO on the cost of a car that can be used to work out depreciation and the GST credit when a business buys a car.
The car limit is a ceiling on the amount of a car's cost that is recognised for certain tax purposes. When a business buys a car for more than the limit, the excess is ignored when working out the depreciation deduction and the GST credit. It is designed to stop the tax system subsidising very expensive vehicles to the same degree as ordinary business cars.
The limit is set by the ATO and changes from year to year, so this entry does not quote a figure. Check ato.gov.au for the amount that applies to the income year in which you first used the car or first held it. The limit that applies is generally the one for the year the car was first used or installed ready for use, not necessarily the year of any later claim.
The limit applies to a car as defined in the tax law, which is a motor vehicle designed to carry a load of less than one tonne and fewer than nine passengers. Many utes and vans fall outside this definition, depending on their carrying capacity, and so are not caught by the cap. Checking the manufacturer's specification is important, as the classification depends on design rather than how you use it.
For GST, the credit you can claim on a car is generally capped at one eleventh of the car limit, even if the car cost more. The GST credit is claimed through your BAS in the usual way, in the period of the tax invoice, subject to business use. If your car is used partly for private purposes, the credit is reduced further to the business percentage. This is often a surprise for buyers of higher-priced cars.
For income tax, the limit applies to the cost used for depreciation, so the decline in value deduction is based on the lower of the cost and the limit. It does not generally apply to running costs such as fuel or servicing. The limit interacts with luxury car tax, which is a separate tax that may be embedded in the car's price but is not recoverable.
A common mistake is claiming a GST credit on the full price of a car costing more than the limit, which would be incorrect. Another is assuming that a ute is automatically exempt without checking its specifications. This is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
Assume, purely for illustration, the car limit is $70,000 and a registered sole trader buys a car for $88,000 including GST, used 100% for business. The maximum GST credit is $70,000 / 11 = $6,363.64, not the $8,000 that one eleventh of the price would give. Depreciation is based on the GST-exclusive amount up to the limit, not on the full cost of the car.
Practical tips
- Look up the car limit for the year you first use the car, because it changes annually.
- Check whether your vehicle is a car under the tax definition, as some utes and vans fall outside it.
- Remember the credit is also reduced by private use, so apply the business percentage on top of the cap.