Claiming car expenses on your tax return – find out how

We have been hearing a lot of noise generated from the Australian Taxation Office (ATO) regarding excessive claims for work related deductions including motor vehicle expenses and we have all been put on our guard to ensure that any claims we make on our 2018 returns are reasonable and can be substantiated.

What are the current rules for claiming motor vehicle expenses?

The following apply to all individuals regardless of whether they are employees or sole traders, and partners in a partnership. They do not apply to trustees of a trust or Pty Ltd companies.

There are now only 2 methods of claiming your vehicle expenses on your tax return.

1. Cents per km
2. Log book method

The rules apply to the following vehicles;

• Cars, station wagons, panel vans, utes and similar vehicles if they are designed to carry less than one tonne or fewer than 9 passengers.
• The rules do not apply to:
  • Motor cycles
  • Taxis on hire
  • Utes and panel vans that are capable of carrying more than one tonne.

A quick look at the vehicle specifications will identify if your ute would be classified as car or not.

You are entitled to choose the method which produces the highest claim, and you are able to switch methods every year if you wish.

The claims are based on using a motor vehicle for business/work travel which is defined as necessary to produce your assessable income. Visiting a client or travel between jobs would be covered, but not travelling from home to the principal work place.

How do the methods work:

1. Cents per km

This method does not require an individual to keep records of their car expenses. The number of business kms travelled in a year can be a reasonable estimate. The claim is capped at 5,000 business kms per year even if more are travelled. There is only one rate of claim which is 66 cents per km regardless of the engine size of the vehicle.

This makes it an easy non-evidence based claim, although the individual must be able to justify their claim to the ATO if required.

2. Log book method

This is the gold standard of all motor vehicle claims. It requires you to keep a log book of all your journeys undertaken for a period of 12 consecutive weeks noting down personal trips and business-related travel. At the end of the 12 weeks a business percentage of travel can be calculated.

The business use percentage enables you to claim this proportion of the running costs of the car

These include:

• registration and insurance
• repairs and maintenance
• interest on loans to purchase the vehicle
• leasing charges if this is applicable
• fuel and oil (this may be estimated if you know the number of kms travelled during the year)
• depreciation of the car

You can only use the log book method provided your business usage is greater than 5,000 kms per year. Below that and you are back to using the cents per km method.

A log book is valid for 5 years, provided the business use does not change radically. To ensure that you are travelling greater than 5,000 kms you need to keep a record of your odometer reading at the beginning and end of year financial year.

Failure to do this will cause the log book to lapse.

Although keeping a log book seems a lot of effort, another advantage of keeping an up to date log book could help lower your exposure to Fringe Benefits Tax(FBT). If you use a company car and are entitled to take it home and use it as a private vehicle when you are not working, FBT would be triggered.

If you have a high business percentage use as verified by your log book, the amount of FBT would be significantly lower using the FBT operating cost method than if you had to use the statutory method which doesn’t involve any record keeping.

In conclusion, be aware that the ATO might want you to justify your motor vehicle business use in future, and if you have a valid log book, you would be able to justify your motor vehicle claims.

– Sarah Butcher, Accountant & Manager

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What are the benefits of claiming car expenses on your tax return?

At Lawrence, our diverse team of specialists will be able to help explain the benefits of claiming car expenses on your tax return.

Contact us today for an obligation-free chat about how this may suit your business.

This article is general information only. It does not give business, accounting, taxation, financial planning or other professional advice or service. It does not consider your specific situation, objectives or needs and if personal advice is required, a detailed analysis of your particular circumstances would need to be sought. Please see our Privacy and Disclaimers page for further information.