Pitcher Partners partner and motor industry specialist Steve Bragg said he is alerting his clients to “an end-of-year double whammy regarding income tax”.
He said that a dealer group generating $200 million in revenue could potentially face an increased tax bill of $1.6m.
Mr Bragg said: “The effect of extraordinary trading conditions leading to higher profits – which is a good problem to have – and the reversal of tax deferrals driven primarily by significantly reduced stock levels combined with higher stock valuations, will potentially result in a perfect storm for income tax due for dealer groups.”
Mr Bragg said that in the year to June 30, 2020 – a pretty ordinary year for trading – a dealer group with $200m in revenue that made a $1m profit (0.5 per cent of sales) would have generated a taxable income of $950,000 and faced a tax liability of $285,000.
But the same group enjoying the significant profitability uptick seen across the industry in the year to June 2021 with $200m in revenue that made a profit of $8m (four per cent of sales) would have generated a taxable income of $9,260,500 and faced a tax liability of $2,778,150 – nearly 10 times more.
Mr Bragg said the difference is the effect on tax deferrals of the very low levels of used car and demonstrator dealers are now carrying compared with 12 months ago.
“Normally the movement in tax deferrals only slightly increases or decreases taxable income in relation to statutory (financial statements) profit. We expect the trading conditions in FY21 to have a significant uplift in taxable income due to the reversal of used and demonstrator stock tax deferrals.”
He said that, in his example, the movement in tax deferrals would change from -$50,000 to $1,260,500.
“An average dealer group will have a significant tax bill due for FY21 driven by increased profits and the reversal of deferred tax liabilities. While paying tax is unavoidable, proactive tax planning will ensure you don’t pay more tax than required.
“The tax deferrals employed by most dealers centre around used and demonstrator vehicle valuation provisions per tax ruling IT 2648 where dealers can obtain independent valuations for used and demonstrator vehicle stock providing a tax deferral.”
In a normal tax year, the provision will move up or down depending on two factors:
- the level of used and demonstrator stock at the dealership, and
- the overall values trajectory in the used-vehicle wholesale market.
“Based on discussions we’ve had with used-vehicle valuers, they believe the average write-down at 30 June, 2021 will likely be in the 5-8 per cent range versus the normal 15-25 per cent range experienced in prior years,” Mr Bragg said.
“The reversal of these independent valuation provisions for tax purposes will have significant impacts on the income tax payable by dealers in FY21.
“We believe the impact to taxable income could be as much as a $1.6m increase to taxable income for FY21.
“This can potentially have a harmful impact on cash flow for the dealer on 1 December, 2021 when the tax bill is due. Assuming no tax planning is employed, in this example, the dealership group would have a tax bill due of approximately $2.5m!”
By John Mellor