Steve Bragg, the motor industry services lead at Pitcher Partners Sydney, said that it was necessary to repeat the warning he made last year because dealers were still facing the “double whammy” of a perfect storm that would see bigger income tax assessments than they were used to paying.

“Dealers are yet again facing an end of financial year double whammy regarding income tax,” Mr Bragg said. 

“The effect of the extraordinary trading conditions from shortages of stock is leading to higher profits. While this is a good problem to have, the reversal of tax deferrals driven primarily by significantly reduced stock levels that has combined with higher stock valuations will potentially result in an unwelcome impact on income tax due for dealer groups again in FY22.

“We expect the trading conditions in FY21 and FY22 to have a significant uplift in taxable income due to overall higher profits achieved by dealers.”

Steve Bragg

Mr Bragg said a typical dealer group with turnover of $200 million in FY 2020 (with profit of 0.5 per cent of sales) would have a profit of $1 million but with a total movement in tax deferrals would have had a taxable income of $950,000. 

For FY 2021 the same turnover of $200 million and a profit at four per cent of sales would see a profit of $8 million. But, due to the extraordinary stock shortages and sky-high valuations, movement in used, demo and other deferrals would be  $1.278 million making a taxable income of $9.260 million with tax at 30 per cent coming to $2.152 million – roughly 10 times the tax for FY20.

Having swallowed that in FY21, dealers are facing a similar scenario this tax year as well.

For FY 2022, impacted by lockdowns and constrained stock, with a profit of 3.5 per cent of sales on $200 million in revenue would be a $7 million profit. With total movement of tax deferrals, taxable income will be $7.174 million with another tax bill of $2.152 million.

“Normally, the movement in tax deferrals only slightly increases or decreases taxable income in relation to statutory (financial statements) profit,” Mr Bragg said. 

“But as you can see, an average dealer group will have a significant tax bill due for FY22 driven by increased profits and additional impacts of the reversal of deferred tax liabilities. 

“While lower than the impact experienced in FY21, the average dealer will pay a higher effective tax rate than the statutory rate for businesses which is 30 per cent if turnover is greater than $50m.  

“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:

1. The level of used and demonstrator stock at the dealership, and
2. 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 in 2022 will likely be in the five to eight per cent range (similar to 2021) versus the normal 15-25 per cent range experienced in prior years.  

“The reversal of these independent valuation provisions for tax purposes have had significant impacts on the income tax payable by dealers in FY21 which will continue into FY22.

“This can potentially have a harmful impact on a dealer group’s cash flow once again on December 1, 2022 which is when the tax bill is due.  

“Assuming no tax planning is employed, dealerships may have significantly overpaid tax based upon FY22 tax instalments paid.  

“Dealers can vary their tax instalments to ensure they don’t overpay in their instalments waiting to get the refund. We suggest this be done in the June 22 instalment so that the dealer group can forecast their profit more confidently to ensure they don’t underpay and incur penalties,” Mr Bragg said.

He added: “Private dealer groups have seen an increase in administrative costs as a direct result of impending changes to financial reporting requirements imposed by ASIC and the increased ATO activity resulting from the private wealth reviews (with some occurring on an annual basis). 

“These additional costs add little value to the company but can be reduced by ensuring the company has an adequate reporting framework and governance policies to manage operational and regulatory risks.”

By John Mellor