When replacing or purchasing a business vehicle, you need to be savvy

If you're a small business owner or a sole trader you've probably used your personal car for work purposes. However, if you're doing this on a regular basis, you're doing yourself a disservice financially.

More to the point, if you need to upgrade your vehicle and you plan to use it for work purposes more than 50 per cent of the time, there are some savvy ways to do it.

Having a business car is a good way to both increase equity in your business and help to reduce your overall tax burden.

Here are a few tips for small business owners and sole traders when upgrading work vehicles.

1 - Don't take out a personal loan or a car loan...

If you're a small business owner or an ABN holder, the temptation is always there to just walk into a bank or lender and take out a personal loan or a car loan to purchase a vehicle, especially if you're new to the business world, but this is a bad idea.

If more than 50 per cent of the car usage is for work purposes, you can apply for a business car loan or a "chattel mortgage".

This allows you to buy the car in your business' name instead of your own as an individual. Depending upon the lender, not only can you to achieve a better interest rate with a chattel mortgage but you can also negotiate a more flexible repayment plan.

Most importantly though, when you take out a chattel mortgage you gain ownership of the vehicle immediately, meaning you can claim the purchase on your tax right away.

This brings us squarely to our next point...

2 - Take advantage of tax write offs... 

When you purchase a car under a chattel mortgage you can take advantage of the instant asset write off threshold, which is currently set at $30,000.

So, if you buy a business vehicle that costs less than this amount, you can claim the entire purchase as a tax write off.

(If you're using the vehicle for personal use too, you need to deduct this before making your claim. So, for example, if you use it 50 per cent for work and 50 per cent for home, you'd only claim half the price of the vehicle in write off.)

In addition, you can claim a maximum of 5,000 kms at a rate of 68 cents per kilometer for the running costs of your car, including depreciation.

Other expenses which can be claimed include fuel, oil, servicing, repairs, interest repayments, insurance and rego. This info sheet from the ATO lays out all of the possible claims.

You can also claim back the GST on the purchase as a business owner, where you can't as an individual or private citizen.

3 - Question whether you actually need to own the vehicle...

I know this one sounds slightly obtuse from the outset but it's really not. If you don't need to own the vehicle then leasing can be a really good solution.

Leasing a vehicle has a few big advantages. Firstly, if you stick to the parameters of your agreement, it can actually be cheaper in the long run than purchasing.

You also don't have to worry about servicing or repairs, that is covered by the lease. Better yet, you don't have to worry about losing money on a depreciating asset.

And, best of all, at the end of the agreement you can simply return the vehicle and upgrade to a newer model.

However, it is important to read the fine print. Some leases have a mileage limit. In other words, you're covered for a certain number of kilometers you drive. If you go over this they can charge a penalty fee. If you're consistently exceeding your limit, it can add up.

It's important to note that you can claim all of your expenses related to your leased vehicle on tax, there are just fewer of them than if you purchase.

At the end of the day though, you need to...

4 - Weigh up the pros and cons and figure out what is going to work best for your business...

Leasing and buying on a chattel mortgage both have their advantages and disadvantages, you just need to be honest about your business needs.

For example, if you want to increase your equity then purchasing the vehicle is probably in your best option. Depending upon the price, you can write upto the full amount off on tax.

You can also do what you want with the vehicle once you've finished paying it off. You can sell it, trade it in or give it to one of your kids as their first car. It doesn't matter, you own it. It's yours.

On the other hand, when you lease a vehicle, you don't own it. More to the point, if you need to liquidate an asset or reduce your costs, you can't get rid of it. Getting out of the contact will likely also come with a hefty fee.

When you purchase a car though, you now own that car. You can trade it in later for a newer model but it will cost you more because the vehicle has depreciated in value.

When you lease a car, you can upgrade every three to five years at no extra cost. You also don't need any money upfront for a downpayment nor do you have to worry about out of pocket expenses like servicing.

If you're savvy and stick to the agreement, it can cost you less in the long run. If you don't, it can cost you more.

In short, there's no right or wrong answers when it comes to securing a business vehicle. Just don't rip yourself off by purchasing it on personal loan or as a private citizen.