Determining the optimal time to upgrade or renew your business vehicles depends on several factors including the need for consistent and reliable service to customers. While there isn’t a one-size-fits-all rule for business owners, considering certain aspects can help you make a well informed decision.
Here are some key considerations to assist you in determining when it is best to upgrade or renew your business vehicles.
1. Operating costs
As vehicles age, their components undergo wear and tear leading to increased operating and maintenance expenses. The rate at which these costs escalate will vary among vehicles. Eventually, there may come a point where replacing the vehicle with a newer one offers better value than maintaining the existing one.
Furthermore, newer vehicles often incorporate advanced technologies that enhance fuel efficiency and reduce operating costs. However it’s important to note that this may not be applicable to all vehicles as reconditioning heavy vehicles can also lower operating costs.
2. Value depreciation
Numerous factors impact the rate at which a vehicle’s value depreciates including:
- mileage
- optional features
- maintenance history
- versatility across different businesses
- introduction of newer models, and
- more.
Typically, a new vehicle experiences an initial depreciation of around 10% when leaving the showroom and another 10% by the end of the first year. Subsequent declines in value depend on the aforementioned factors. It’s essential to identify the point where the vehicle’s value diminishes rapidly as upgrading just before that stage may be more financially beneficial.
3. Tax depreciation
For tax purposes, the cost of the vehicle can be expense depreciated over its useful life. There are two allowable ways – the prime cost method and diminishing value method.
The prime cost method assumes the value of depreciation is decreased uniformly over its effective life while the diminishing value method assumes the value decreases more in the early years.
Source: ATO
When utilising the diminishing value method for tax depreciation, it’s important to note that a significant portion of the vehicle’s value will have already been deducted in the initial years of ownership. As a result, the deductions in future years will be substantially reduced. This means that if you opt for the diminishing value method, the cost of a new vehicle can be partially offset by the additional deductions associated with its purchase.
By acquiring a new vehicle, you can take advantage of higher depreciation deductions in the earlier years of ownership potentially providing you with a more substantial tax benefit. This is particularly relevant if you have already claimed a significant portion of the deductions for your current vehicle. Upgrading to a new vehicle resets the depreciation schedule allowing you to capitalise on the increased deductions available in the early years of owning the new vehicle.
It’s worth noting that the specific tax implications and benefits will depend on your individual circumstances surrounding your business. Therefore, it’s advisable to consult with a qualified tax professional or accountant who can provide personalised guidance based on your unique situation.
4. Finance
Financing plays a significant role in the decision making process when it comes to purchasing business vehicles. Many business owners opt for financing options to preserve capital that can be utilised elsewhere within their business operations. The length of the financing arrangement can also impact the timing of a vehicle’s upgrade.
At the end of the initial financing term, some owners may choose to refinance their existing vehicle or explore upgrading to a new vehicle with new financing terms. Both options provide an opportunity to avoid tying up additional capital in vehicle capital costs.
By refinancing, owners can extend the repayment period or negotiate more favourable terms allowing them to continue using the existing vehicle without incurring the full cost of purchasing a new one. On the other hand, upgrading to a new vehicle through a new financing arrangement provides the benefits of newer technology, improved efficiency and potentially lower maintenance costs.
As the business owner, you have the best understanding of your specific business needs and priorities. You are in the ideal position to determine the frequency at which you would like to upgrade, recondition or expand your vehicle fleet.
Factors such as changes in business requirements, industry trends, technological advancements and financial considerations should be taken into account when assessing the timing and frequency of vehicle upgrades.
Carefully evaluating your business’s financial capacity, cash flow and long term goals will help you make informed decisions about financing and upgrading your business vehicles. Additionally, consulting with financial advisers or professionals experienced in business vehicle financing can provide valuable insights and guidance tailored to your specific situation.
