Work-related car expenses are among the simplest business expenses that can be claimed against your tax bill, thus saving you money. However, claiming does require some discipline. There are different methods like the ATO cents per km and logbook methods to choose from. This guide will help you decide which car expense deduction method is right for your small business.
A car expense is a cost associated with the running of a car and can include fuel, tyres, servicing, repairs, insurance, tolls, parking, registration, hiring, interest on vehicle loans, lease payments and depreciation. A work-related expense is one that is incurred whilst performing your job.
WHY should I bother?
To claim a motor vehicle expense, you must be able to provide the Australian Tax Office (ATO) a sound justification for the kilometres that you travelled for work purposes. Unfortunately, just because you have a work vehicle that may even advertise your services on the side, it does not mean you can claim 100% of its costs. The ATO is looking to understand how much you used this vehicle for business purposes versus private usage. So, unfortunately, the trip down to the beach in the ute is unlikely to be a tax deduction.
When you add up the costs of owning and running a vehicle, these costs can run up to hundreds of dollars a week. Over a year, that is thousands of dollars. If some of this can be claimed, it is much better in your pocket.
WHAT can I claim as car expenses?
Claimable work travel includes:
- Travel between work locations
- Travel to a customer
- Travel to pick up work equipment or supplies
- Travel to work-related conferences and training courses
Travel from your home to work is not a tax deduction. This includes travel where you may do minor work-related tasks such as collecting mail. Travel from home to work can be claimed where:
- You are a home-based business, so any business travel can be claimed such as visiting the bank or accountant.
- You need to transport bulky items to and from their usual place of work where there is no reasonably secure storage provided on-site. For example, a tradie van or ute contains the tools of the trade.
- You need to travel to a different location for business purposes, such as a customer meeting before or after work.
- You are on-call, and thus your work has commenced before you leave your home. This would include emergency services, medical staff and after hour repair technicians.
HOW do I claim car expenses?
1. Cents per km method
2. Logbook method
3. Actual cost method
You may only use one method per year per vehicle.
If you are a Sole Trader or Partnership, you can choose between cents per km or the logbook method. However, if you own a motorcycle or a vehicle designed to carry either greater than one tonne or nine or more passengers, you must use the actual cost method. Thus, if you are a tradie with a one-tonne, ute you must keep actual records all year long.
If you are a Company or Trust, you also must use the actual costs method.
Cents per kilometre method
Every year you can claim up to 5000 kilometres per car based on a cents per kilometre deduction. For the 20/21 tax year, this rate is $0.72 per km. You must provide electronic or written evidence such as a diary to substantiate your kilometres travelled. We suggest you record the date, starting and ending kilometres and reason for travel. If you made a business trip in the 20/21 tax year of 32km, you could claim 32 x $0.72=$23.04.
The logbook method is a means to calculate the percentage of business travel versus private travel. It requires you to keep an electronic or written logbook per car for a single 12-week period within the taxation year.
As a separate exercise, you must record all your car-related expenses for that income year such as fuel and servicing expenses. Although we don’t recommend it, costs can be estimated based on odometer readings.
If over the 12 weeks you travelled 10,000 k kilometres and 6,000 were for business, then your business usage would be 60% (6,000/10,000). If your car expenses, including depreciation, were $9,000 for the income year, you could claim $5,400 ($9,000 x 60%).
The ATO states your logbook must include:
- when the logbook period starts and ends
- the vehicles odometer readings at the beginning and end of the logbook period
- the distance the car travelled during the logbook period
- kilometres travelled for each journey. If you make multiple journeys on the same day, you can record them as a single journey
- reason for the trip (business reason or private use)
- date of the journey
- odometer readings at the beginning and end of the trip
- the odometer readings at the start and end of each subsequent income year your logbook is valid for
- the business-use percentage for the logbook period
- the brand, model, engine capacity and rego of the car.
Actual cost method
The actual cost method requires you to keep track of every journey and every cost for that vehicle whilst it is owned by the business. As part of this process, you must keep the same sort of records as per the logbook method, but for 52 weeks or the time you have owned the vehicle. The costs for the year, including depreciation, can then multiply by your actual business use percentage to work out the deduction you can claim.
If you provide a vehicle to an employee or a spouse, tax implications are best discussed with a tax accountant.
At the time of writing, the government provides a tax incentive to write a car off in the current financial year via temporary full expensing.
If your employee uses their own car for your business, your business can claim a deduction for any motor vehicle allowances or reimbursements you pay them for their costs, such as the cost of fuel.
There are various smartphone applications available to help you keep track of vehicle expenses, just search car logbook apps in your app store. Some of these will use GPS tracking to make your input easier. The ATO also provides a handy app to keep track of vehicle trips and other business expenses and income.
If using the logbook method best not to include your 4-week driving holiday as part of the 12 week calculation period.
Information on buying vs leasing can be found here.
A guide to buying a van can be found here.
SUMMARY – work-related car expenses
Business use of a vehicle is tax-deductible. There are three methods to claim a deduction; the choice depends on your business structure and the type of vehicle you use. Accurate record-keeping is important and will make your life so much easier come tax return time. If in doubt about anything discussed in this guide, we recommend you contact your accountant or seek clarification from the ATO