Many Australians use their car, or have a dedicated vehicle, they use for their work. As such, any vehicle expenses incurred can be claimed as a tax deduction to reduce your overall tax liability.
Pro Tax Tip: You can only claim the business portion of your vehicle expenses. If you use your car for both private and business use, the expenses will need to be apportioned.
Claiming your vehicle expenses can be done using:
- The cents per kilometre method
- The logbook method
- The actual cost method
Claim Vehicle Expenses: Sole Trader and Partnerships vs Companies and Trusts
For a car, if you run your own business as a sole trader or partnership, you have two options to claim vehicle expenses:
- Cents per kilometre method – This is the simplest option. You claim a set rate for each work kilometre travelled up to a maximum of 5,000 kms
- Logbook method – You keep a logbook of all vehicle trips for a representative period, calculate the percentage of trips that were work-related, and claim that same percentage of all vehicle expenses like fuel, insurance, etc. This usually provides a larger deduction.
For motorcycles, large trucks, or buses, you must use the actual cost method. This means claiming the actual expenses like fuel, insurance, repairs, etc. And apportion based on your estimated to work use.
If your business is a company or trust:
You must always use the actual costs method to claim vehicle expenses. This means claiming the actual expenses that relate to work use, no matter what type of vehicle you have.
Sole traders and partnerships have a choice of simpler methods for cars (cents per km or logbook), while companies and trusts must always use the actual costs method for any vehicle. The actual costs method requires keeping detailed records of all vehicle expenses and work use.
For tax purposes in Australia, a car is defined as a vehicle that:
- Can carry less than 1 tonne of weight
- Has fewer than 9 seats, including the driver’s seat
This means things like regular passenger cars, SUVs and station wagons qualify as cars. But motorcycles, trucks and buses do not.
Details of the 3 different methods to claim vehicle expenses
In order to claim work-related car expenses as an employee , the car must be owned or leased by the you. This means:
- You personally own the car outright
- You have a loan or hire purchase agreement for the car
- You have a lease for the car in your own name
Salary sacrifice or novated lease arrangements where your employer leases the car and pays the costs do not qualify. In those cases, your employer claims the expenses, not you.
However, you can still claim additional expenses like parking and tolls for work-related use of a salary sacrificed car.
In some cases, you may be able to claim expenses for a car owned by a family member if you have a private arrangement with them to use the car for work purposes. You’ll need evidence of this arrangement.
Vehicle Expenses: The Cents Per Kilometre Method
From 1 July 2022, the cents per kilometre rate for work-related car expenses is 78c.
To calculate your claims using the cents per kilometre method:
- Estimate or track the number of kilometres you drive your car for work purposes during the financial year. This includes driving to meet clients, visit work sites, attend meetings, etc.
- Multiply that number of work kilometres by the cents per kilometre rate set by the ATO for that financial year.
- The result is an estimate of your work-related car expenses that you can claim as a tax deduction.
- You drive your car 10,000 kilometres for work in the 2022-23 financial year
- The cents per kilometre rate for 2022-23 is 78 cents
Note: There is a maximum limit of 5,000 kms that can be claimed using this method.
- So you multiply 5,000 kilometres by 78 cents = $3,900
- You can claim a $3,900 tax deduction for work-related car expenses
The cents per kilometre rate is meant to cover all of your vehicle expenses like fuel, maintenance, depreciation, etc. You don’t need to track those expenses separately – just track or estimate your work kilometres and use the rate per kilometre.
The main things to remember are:
- Keep records to show how you calculated your work kilometres
- You can claim up to a maximum of 5,000 work kilometres per car
Pro Tax Tip: The rate changes occasionally over different financial years, so use the correct rate for the year you’re claiming for.
Vehicle Expenses: Logbook Method
First, you keep a logbook for at least 12 continuous weeks where you record every trip you make in the car. For each trip, you note:
- The date
- The destination(s)
- The purpose (work-related)
- The odometer readings at the start and end of the trip
- The total kilometres travelled
- The odometer reading as at 30 June each year
This helps you determine what percentage of your total car use was for work purposes.
Then, you keep receipts for all your car expenses like fuel, insurance, repairs, etc. during that logbook period.
To calculate your deduction:
- Add up all the kilometers you drove for work purposes during the logbook period.
- Add up all the kilometers you drove in total during that period.
- Divide the work kilometers by the total kilometers to get your work use percentage.
- Multiply that work use percentage by your total car expenses during the logbook period. The result is the amount you can claim as a tax deduction.
- You drove 20,000 kilometers in total during the logbook period
- 5,000 of those kilometers were for work purposes
- Your total car expenses were $5,000
- 5,000 work kilometres / 20,000 total kilometers = 25% work use
- 25% x $5,000 total expenses = $1,250 deduction
So, in this example, you could claim a $1,250 tax deduction for your work-related car expenses that year.
The logbook method is more accurate than the cents per kilometre method, but it requires more record keeping. You’ll need to retain your logbook and expense records for 5 years. The same logbook % claim can be used for 5 years as long as the odometer reading as at 30 June each year is recorded in that logbook.
Vehicle Expenses: Actual Cost Method
With the actual expense method, you claim a deduction for the actual costs you paid that relate to using your vehicle for work.
This includes expenses like:
- Fuel – You claim the actual cost of fuel used for work purposes based on receipts or a reasonable estimate.
- Oil and lubricants – Costs for oil changes and other lubricants can be claimed in full if the vehicle is used 100% for work, or a proportion based on work use.
- Registration and insurance – These costs can be claimed in full for a vehicle used 100% for work, or a proportion based on work use.
- Repairs and maintenance – The cost of repairs and servicing can be claimed in proportion to work use.
- Lease costs – If you lease the vehicle, you can claim lease payments in proportion to work use.
- Decline in value – You can claim a deduction for the decline in value from depreciation and wear and tear from using the vehicle for work.
To claim these expenses, you’ll need to keep records like:
- Receipts for fuel, repairs, and other expenses
- Records of odometer readings
- Lease or finance agreements
- Logbook if you don’t use the vehicle exclusively for work.
The actual cost method requires detailed records but can provide larger deductions than the cents per km, especially for vehicles with high operating costs.
If using this method when the vehicle is owned by a company or trust, any private use by an employee may give rise to fringe benefits tax (FBT) which can complicate things. FBT will not be covered in this blog but it is an issue to be aware of if deciding to purchase a vehicle under these type of entities.
What Does The ATO Consider To be Driving-Related Business?
Business-related driving includes any driving you do as a necessary part of performing your job or generating income. This includes:
- Driving between workplaces – If you have multiple jobs or workplaces, driving between them is considered business-related.
- Client visits – Driving to meet clients, visit customers or provide services to clients counts as business use.
- Business errands – Any driving you do to purchase supplies, materials or equipment for your business is considered business-related.
- Delivering goods or services – If your work involves delivering products or providing services to clients, that driving is regarded as business use.
However, some types of driving are not considered business use by the ATO, including:
- Commuting to and from your main workplace – Your regular trips between home and your primary place of work are considered private, not business use.
- Carrying tools – Simply having tools in your car does not make your regular commute a business trip.
- Vehicle advertising – Displaying advertising on your vehicle does not automatically make all driving business use.
Common Vehicle Related Tax Deductions
Some common tax deductions related to vehicle expenses include:
- Fuel costs – You can claim the cost of fuel used for work purposes based on either actual receipts or an estimate based on kilometres travelled and the average fuel consumption for the vehicle multiplied by the average fuel cost over the year.
- Registration and insurance – You can claim a percentage of your vehicle registration and insurance costs equal to the percentage of work use. For example, if you use your vehicle 50% for work, you can claim 50% of registration and insurance costs.
- Repairs and maintenance – Any costs to repair or maintain your vehicle in order to keep it roadworthy for work purposes are tax deductible. This includes servicing, tyres, and repairs to parts used for work.
- Lease costs – If you lease your vehicle, you can claim a percentage of your lease payments equal to the percentage of work use. You’ll need records showing the lease interest portion. If claiming lease costs you cannot claim depreciation as you don’t actually own the vehicle.
- Interest – If you have finance under a Hire purchase, loan or chattel mortgage arrangement then you can claim the interest charges but not the actual repayments. Depreciation of the cost of the vehicle would be claimed instead of the repayments.
- Depreciation – If you own the vehicle outright, you may be able to claim a deduction for the decline in value (depreciation) of the vehicle over time. The amount depends on the cost and useful life of the vehicle.
- Parking and tolls – Costs for parking and road tolls incurred while travelling for work purposes are tax deductible.
Vehicle expenses can be complex to claim correctly, with many rules and record keeping requirements. Getting it wrong can lead to underclaiming deductions you’re entitled to or, at worse, an ATO audit. Using a tax agent gives you extra assurance that expenses have been claimed correctly according to the law. A tax agent can provide that extra level of assurance and peace of mind that your vehicle expenses have been claimed correctly and legally.