Guide to motor vehicle tax deductions
Use your car for work? Find out what you need to know about claiming your expenses.
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It's important to understand exactly what you can and can't claim at tax time, and a common deduction is expenses related to your vehicle. Working out what qualifies can be confusing, but it will be a benefit to you to claim any car-related expenses that qualify as deductions.
This guide will help you learn what options you have and what you’re able to claim, and not claim, when it comes to car-related expenses.
What car costs can I claim on my taxes?
Under Australian tax law, you’re able to claim any employment-related car expenses if you incur them while using your own vehicle to perform your job as an employee. You can incur work-related car expenses by doing any of the following:
- Loading/unloading tools and other equipment that are required to complete your job.
- Picking up or dropping off delivery items on behalf of your employer.
- Travelling to and from two different workplaces (for example between a full-time and part-time job).
- Travelling in order to perform itinerant work.
- Travelling to business meetings, conferences, or other events required by your employer.
- Travelling from your home to an alternative workplace (not your main workplace) and then back to your main workplace or back home at the end of the day.
How do I track my car costs?
There are two main ways to claim your car-related expenses: the log book and cents-per-kilometre.
Method 1: The logbook
There are several things to keep in mind when using the logbook method for recording your business-related car expenses:
- Under this method, the claim you make is based on the business-use percentage of your car-related expenses. You determine your business-use percentage by keeping track of your expenses for a minimum of 12 weeks (and updated every five years) in a log book.
- In this log book, you’re required to log all business journeys made in your car during the set time period. You’ll need to record the following general information:
- The period that the log book begins and ends
- The vehicle’s odometer readings at the beginning as well as at the end of this period
- Total kilometres driven during the period
- The business-use percentage for the period
- Each individual journey recorded in your log book must have the following information:
- Start and finish times
- Starting and ending odometer readings
- Total kilometres travelled
- Business reason for the journey
- You can claim all operating expenses for your car at the business-use percentage you’ve initially set in your log book.
- Make sure to keep all receipts gathered throughout the year to justify your claims, including receipts for things like servicing and repairs.
- Depreciation is calculated as one-quarter, or 25%, of the recorded value for your vehicle.
Method 2: Cents per kilometre
The second method you can use to claim car-related expenses is the cents-per-kilometre method. This method is outlined as follows:
- Your claim is based on a fixed rate for each business kilometre you travel. You’re able to claim up to 5,000 kilometres per year under this method.
- The claim is calculated by multiplying the total business-related kilometres you travel (max of 5,000 km) by the standard fixed rate of 66 cents per kilometre. This amount represents all depreciation and other vehicle expenses.
- Although you don’t need written evidence for this method, you’ll need to demonstrate that you’ve incurred the expenses you’ve claimed. Diary records of the particular business journeys you’ve made are sufficient.
What expenses can’t I claim?
You can’t claim the drive to and from your home and your main workplace. This is considered “private” use, even if:
- You’re completing small tasks required by your employer on the way to work (eg, picking up the mail or other deliverables for your employer).
- You’re driving back to work for things such as security calls or even parent-teacher interviews if you’re employed in an educational organisation.
- You’re working overtime and there’s no public transport for you to get home.
Tax benefits you may not know about
Besides claiming your car-related expenses for tax purposes, you’re also able to take advantage of the following options to reduce your taxes:
$20,000 immediate tax deduction
Following a recent announcement by the government, small business owners in Australia can now claim tax breaks of up to $20,000 on business-related purchases, including purchases of new or used vehicles.
The federal government has budgeted $1.75 billion dollars for this tax deduction specifically to help Australian small business owners. This tax break applies to small businesses with annual turnovers of less than two million dollars.
If you’re looking to purchase a new or used vehicle for your business, make sure you look into this special tax deduction if your vehicle is worth $20,000 or less. Also, make sure to look for this deduction on other business-related purchases.
Another tax-incentivised option for buying a new business-related vehicle is the chattel mortgage, a finance product offered by lending institutions specifically for the purpose of purchasing a vehicle. With this loan, you’re able to remain the legal owner of the vehicle while providing it as security to your lender.
The biggest benefit of a chattel mortgage is the tax incentive that comes with it. You’re able to claim the GST you paid when buying your vehicle as an Input Tax Credit. This will help you a lot come tax time.
On top of this, you’re able to deduct both interest charges and the vehicle’s depreciation.
Another way to finance the purchase of a vehicle while still taking full advantage of tax benefits is the novated lease. This type of financing involves an agreement between you, your employer and a third-party lender. You take out a lease on the vehicle you plan to purchase, and your employer then makes the lease repayments by deducting the operating costs from your pre-tax income.
Not only does this option give you a simple way to finance a vehicle and manage your payments, it also gives you an added tax benefit because you can take advantage of a lower tax rate. Since your payments are coming from your pre-tax income, your taxable income is decreased.
When it comes to motor vehicle expenses, make sure you know exactly what tax-incentivised options are available as well as what you’re able to claim as deductions. Make sure you get the most out of this tax season by taking advantage of all your options.
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