Vehicle expenses represent one of the largest untapped tax deductions for Australian workers and business owners. Each year, millions of dollars in legitimate claims go unclaimed, while others attract ATO attention for overclaiming. The difference often comes down to knowing exactly how to claim vehicle expenses properly.
How can so many Australians be underestimating their vehicle-related tax deductions? Let’s take a look at a few examples we’ve seen come across our desks.
As accountants, we often see delivery drivers tracking fuel but missing out on depreciation. Meanwhile, sales reps often claim the obvious expenses while overlooking parking fees and tolls. Then there are the tradies who give up on claiming altogether, understandably deeming the paperwork too complex.
If you’re earning a decent amount of money anyway, these missed opportunities might not seem like that big of a deal. But they can add up to thousands in unclaimed deductions each year. Why just give that money away?
This comprehensive guide will walk you through every aspect of vehicle expense claims. You’ll learn which expenses qualify, how to choose the best claiming method for your situation, and how to maintain proper documentation that satisfies ATO requirements. By the end, you’ll have the knowledge to maximize your legitimate claims while staying safely within tax regulations.
How to Claim Vehicle Expenses as a Sole Trader or Partnership
If you run your own business as a sole trader or partnership, and you use a car to fulfill work duties, you have two options to claim vehicle expenses:
- The 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 km.
- The 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.
Using a motorcycle, large truck, panel van, or bus to carry out business related travel? You’ll have to use the actual cost method. This means claiming the actual expenses like fuel, insurance, repairs, and the like. You’ll then have to apportion the costs based on your estimated to work use.
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.
How to Claim Vehicle Expenses as a Company or Trust
If you run 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). However, 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. It also demands that you only claim the work-related portion of the vehicle expenses.
What Counts as a Car for Tax Purposes?
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.
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How to Claim Vehicle Expenses as an Employee
To claim work-related car expenses as an employee, you must be the one who owns or leases the vehicle. This means one of the following must be true:
- 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 fees 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. As with everything tax-related, you’ll need documented evidence of this arrangement.
The 3 Methods for Claiming Vehicle Expenses
Each method for claiming vehicle expenses has its own advantages and record-keeping requirements. The cents per kilometre method suits those with straightforward claims and minimal paperwork. The logbook method typically yields higher returns for heavy vehicle users but requires detailed documentation. The actual cost method, while more demanding, proves invaluable for businesses with dedicated work vehicles.
Your choice of method can significantly impact your tax return.
For example, someone driving 4,000 work kilometers yearly might benefit from the simplicity of the cents per kilometre method. However, a real estate agent covering 30,000 kilometers annually would likely see substantially higher returns using the logbook method.
Success lies in matching the method to your specific situation and record-keeping capabilities.
Vehicle Expenses: The Cents Per Kilometre Method
For the 2024-25 tax year, the rate for work-related car expenses is 88 cents per kilometre.
Pro tax tip: Still completing tax returns from previous years? The rate will be different. Check the ATO website to confirm the correct rate for each financial year. And if you’re a fair way behind on tax returns, contact ITP today. This can be a tricky situation to handle, and our skilled accountants are well-equipped to help you get the best possible outcome.
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.
For example:
- 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 covers all of your vehicle expenses. That means you can’t claim extra for fuel, maintenance, depreciation, etc. However, it also means you don’t have to track those expenses separately. Instead, you just track 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 only claim up to a maximum of 5,000 work kilometres per car each year
Pro Tax Tip: The cents per kilometre rates change occasionally. So always check to ensure you’re using the correct rate for the year you’re working on in your tax return.
Vehicle Expenses: The Logbook Method
To use this method, you’ll need to keep a logbook for at least 12 continuous weeks. This means meticulously recording every trip you make in the car. For each trip, you’ll have to 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.
On top of this, you’ll need to keep receipts for all your car expenses. This includes fuel, insurance, repairs, and all other vehicle costs incurred 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.
For example:
- 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: The 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 method, especially for vehicles with high operating costs.
When using this method as 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.
READ: How Do You Calculate Fringe Benefits Tax?
Will the ATO Accept Your Vehicle Expense Claim?
The key to a successful vehicle expense claim lies in understanding exactly what the ATO considers legitimate business use. Many claims get rejected simply because the type of driving doesn’t qualify. The rules are specific, and knowing them saves both time and potential ATO scrutiny.
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, 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.
Common Mistakes That Could Trigger an ATO Review
Now that you know how to claim vehicle expenses on your taxes, it’s worth taking a minute to ensure you avoid the most common pitfalls. Here they are in no particular order:
- Mixing up the methods: You can’t switch between cents per kilometre and logbook methods for the same car within one financial year. Pick one and stick with it.
- Home office confusion: Working from home doesn’t automatically make your garage a business premises. Trips to get coffee or lunch remain personal, even when you’re working from home.
- Mixing up multiple jobs: If you’re claiming vehicle expenses for multiple income sources, each claim needs its own separate documentation. The same kilometer can’t be claimed twice.
Digital receipt storage has made record-keeping easier, but the five-year retention rule still applies. Store those records somewhere secure—preferably with backups. The ATO’s increasing data-matching capabilities mean they can spot discrepancies between your claims and your digital footprint more easily than ever.
Electric and Hybrid Vehicles: Special Considerations
The tax treatment of electric and hybrid vehicles deserves special attention in 2025, with several significant benefits and changes to consider.
Fringe Benefits Tax (FBT) exemption applies to eligible electric vehicles that meet specific criteria:
- They must be zero or low emissions vehicles first held and used after July 1, 2022
- They must never have been subject to luxury car tax.
However, it’s important to note that from April 1, 2025, plug-in hybrid electric vehicles will no longer qualify as zero or low emissions vehicles under FBT law.
While charging costs can be claimed, calculating these expenses requires careful consideration. For zero emission electric vehicles, employers can use a simplified calculation method of 4.20 cents per kilometer for home charging. However, plug-in hybrid vehicles require actual cost calculations and cannot use this simplified rate. Business owners need to maintain detailed records to substantiate charging costs, whether from home or commercial charging stations.
The luxury car tax threshold is indeed more favorable for fuel-efficient vehicles, set at $89,332 in the 2024 financial year, compared to $76,950 for other vehicles. This higher threshold applies to vehicles with fuel consumption not exceeding 7 litres per 100 kilometres.
Despite the FBT exemption, these benefits remain reportable fringe benefits, requiring employers to calculate their notional taxable value for reporting purposes. This means while there may be tax savings, there are still administrative requirements to consider.
Don’t Drive Yourself Crazy: Getting Help with Vehicle Claims
We know keeping track of vehicle expenses isn’t exactly anyone’s idea of a good time. You probably didn’t get into business dreaming about logging kilometers and filing receipts! But think of it this way: every dollar you legitimately claim back is one more dollar you can use to grow your business, support your family, or just enjoy life.
The rates and rules around vehicle expenses are always changing. That’s why it’s worth bringing in a tax agent to help you stay on top of the latest regulations. ITP’s friendly tax accountants can help you avoid ATO speed bumps while making sure you’re claiming everything you’re entitled to.
At the end of the day, we want you focusing on what you do best—running your business—not staying up late wondering if you’ve calculated your logbook percentage correctly. Whether you’re driving an electric vehicle, a trusty ute, or anything in between, getting professional usually saves you more than it costs. Plus, it’ll give you one less thing to worry about when tax time rolls around. After all, peace of mind is priceless (and when it comes to accounting services, tax-deductible).
Find your nearest branch to book an appointment today. ITP has offices Australia-wide, and we offer remote tax services to ensure all Australians can access the help they need.