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Tax Implications of Buying a Car with Cash

Tax Implications of Buying a Car with Cash

Purchasing a car is a significant financial decision, and when you choose to pay with cash, it might feel like a straightforward transaction. However, even a cash purchase comes with its set of tax implications that are worth understanding, especially if you’re looking to optimize your financial planning. Let’s break down what you need to know about the tax side of buying a car outright with cash.

1. No Financing, No Interest, No Deductions

When you finance a car, the interest you pay on the loan can sometimes be deductible, especially if you use the car for business purposes.

However, when you pay with cash, there’s no loan and, therefore, no interest. This means you miss out on potential tax deductions that could lower your taxable income.

2. Sales Tax

Regardless of whether you buy with cash or finance, you’ll pay sales tax on your purchase. In Australia, this is called the Goods and Services Tax (GST).

The GST rate is 10% of the purchase price of the vehicle. Paying with cash doesn’t exempt you from this tax, and it’s an important factor to consider as it adds a substantial amount to the overall cost of the vehicle.

3. Luxury Car Tax

If the car you’re purchasing is considered a luxury vehicle, you might also be subject to the Luxury Car Tax (LCT). This tax is aimed at higher-priced vehicles and is calculated if the car exceeds a certain price threshold, which is periodically adjusted.

For instance, for the 2021-2022 financial year, this threshold was set at AUD 68,740. The LCT is charged at 33% on the amount above the threshold, which can significantly increase the upfront cost of buying a luxury car with cash.

4. Depreciation and Capital Allowances

When you use your car for business purposes, you can claim depreciation as a tax deduction. Depreciation is a way of acknowledging the wear and tear on your vehicle over time.

For cash purchases, you can start depreciating the car from the time you put it into use until it reaches its salvage value or you stop using it for business purposes.

5. Instant Asset Write-Off

For small business owners, buying a car with cash could mean taking advantage of the Instant Asset Write-Off scheme. This allows businesses to write off the entire cost of the asset (in this case, the car) in the year it was purchased and used.

The eligibility and limit for this write-off can change with federal budgets, so it’s crucial to check the current year’s provisions.

6. No Credit Impact

While not a direct tax implication, it’s worth noting that paying with cash means there is no impact on your credit score from taking out a new loan.

Although this doesn’t affect your taxes, it influences your overall financial health, which is an essential aspect of fiscal management.

7. Record Keeping

When you buy a car with cash, keeping detailed records becomes crucial, especially if you claim business-related deductions.

You should keep all receipts and documentation related to the purchase and use of the vehicle for tax purposes.

Accurate records ensure you can substantiate your claims if the Australian Tax Office (ATO) requires evidence.


Buying a car with cash is simple but understanding the tax implications can help you make more informed financial decisions. Whether it’s GST, LCT, or claiming deductions like depreciation, each aspect plays a crucial role in your financial landscape.

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This guide helps you navigate the financial implications of buying a car with cash, ensuring you’re equipped with the knowledge to manage your purchase wisely.