Navigating the intricacies of tax deductions for motor vehicle expenses can get a bit confusing! This is especially the case because the rules can differ slightly depending on if you are an employee versus self-employed. This blog will take you through the different ways in which you can claim your car costs, depending on your specific situation.
Employed V Self-Employed
Employees can claim work-related car expenses for using a car they own, lease, or hire (under a hire-purchase agreement). As an employee, you can can use either the logbook method or the cents per kilometre method to calculate your deductions. However, you cannot claim expenses for motorcycles, vehicles with a carrying capacity of one tonne or more, or vehicles that can transport nine or more passengers. Additionally, employees cannot claim car expenses for normal trips between home and work unless specific conditions are met, such as carrying bulky tools or having shifting places of employment.
As a self-employed individual, on the other hand, you can claim actual expenses incurred for using your vehicle for business purposes. This includes costs such as fuel, oil, insurance, loan interest, and the decline in value of the vehicle. You must keep receipts for all expenses and records to show the work-related use of the vehicle, typically through a logbook. The self-employed can claim these expenses for all types of vehicles, including those with a carrying capacity of one tonne or more and vehicles that can transport nine or more passengers. This includes Motorcycle’s, Utes or panel vans designed to carry loads of one tonne or more and Minivans that can carry nine or more passengers
Claiming Car expenses as an Employee
Methods of Claiming: Employees can claim work-related car expenses using two primary methods:
Cents per Kilometre Method: This method allows you to claim a set rate per kilometre for up to 5,000 business kilometres per car per income year. For the 2022–23 income year, the rate is 78 cents per kilometre and for the 2023-2024 income year, the rate is 85 cents per kilometre. This rate covers all car running expenses, including depreciation.
Logbook Method: This method requires you to keep a logbook for a continuous 12-week period, recording all business-related travel. You can then claim the business-use percentage of each car expense, including fuel, oil, insurance, and depreciation.
Records to Keep: Regardless of the method used, employees must keep: receipts for all expenses, a logbook (if using the logbook method), odometer readings, details on how the claim was calculated.
Claiming Car expenses when Self-Employed
Methods of Claiming: Self-employed individuals can claim actual expenses incurred for using their vehicle for business purposes. This includes:
- Fuel and oil
- Repairs and servicing
- Insurance
- Loan interest
- Lease payments
- Registration
- Depreciation (decline in value) of the vehicle
Conditions for Claiming: Self-employed individuals must exclude any private use of the vehicle. They can only claim the business-use portion of the expenses. For example, if a vehicle is used 70% for business and 30% for private purposes, only 70% of the expenses can be claimed.
Records to Keep: Self-employed individuals must keep detailed records to substantiate their claims, including: Receipts for all expenses, A logbook to record business-related travel, Odometer readings at the start and end of each year, Loan or lease documents, Tax invoices, Registration papers.
Depreciation: Self-employed individuals can claim depreciation on the business portion of the vehicle’s cost. For the 2022–23 income year, the depreciation limit for cars is $64,741. For the 2023-24 income year, it is: $68,108. The instant asset write-off applies for vehicles costing $20K or less (exclusive of GST if you are registered for GST).
Claiming Car expenses as a self-employed Company Director & Employee
The methods of claiming, eligible vehicles, conditions and record-keeping rules etc are identical under a company structure, except for 1 key difference: the concept of Fringe Benefits Tax.
Fringe Benefits Tax (FBT) is a tax that employers pay on certain benefits they provide to their employees or their employees’ associates, in addition to or as part of their salary or wages. These benefits can include things like private use of a company car, low-interest loans, or payment of private expenses. FBT is separate from income tax and is calculated on the taxable value of the fringe benefits provided.
So, put simply, if you run your business in a company structure and your company owns your car, the fringe benefits tax laws will likely apply to account for your private use of your company car.
Important note: If you run your business as a Sole-Trader, Partnership, or Trust and you employe staff who take non-cash benefits (such as a car) – the FBT laws may also apply in terms of the benefits you provide to those staff. They will only apply to you as the business owner if you run your business in a Company structure.
FBT & Car expenses in a Company
If a company car is available for private use by an employee, FBT applies. Private use includes home garaging, personal trips, and any non-business-related travel.
IMPORTANT! Even if you post a journal entry to account for the private use of a company car, you still need to register for Fringe Benefits Tax if you are deemed as providing a fringe benefit to your employees. Posting a journal entry does not exempt you from the requirement to register for FBT and lodge an FBT return (despite the fact that this may well be a nil FBT return).
Calculating FBT:
Statutory Formula Method: This method applies a flat rate (20%) to the car’s base value to determine the taxable value of the fringe benefit.
Operating Cost Method: This method calculates the taxable value based on the actual operating costs of the car, adjusted for the percentage of private use.
Claiming Car Expenses: The company can claim a tax deduction for all car expenses, including fuel, maintenance, insurance, and depreciation. The portion of expenses related to private use, which is subject to FBT, is also tax-deductible HOWEVER FBT is payable on this portion. Alternatively, you can take up a private-use journal (meaning that you don’t claim your car expenses). In this case, your FBT liability will likely be nil.
FBT Records: The company must maintain detailed records, including logbooks, odometer readings, and receipts for all car expenses.Accurate records are essential for calculating the business versus private use of the vehicle and determining the FBT liability.
FBT Payment and Reporting: The company must calculate the FBT payable on the private use portion of the car.
FBT is reported and paid annually, and the company must lodge an FBT return with the ATO. The company may also need to report the fringe benefit on the employee’s payment summary or through Single Touch Payroll.
Exceptions to having to register for FBT
In terms of a company car, there are specific exceptions where you may not need to register for FBT. These exceptions generally relate to the type of vehicle and the nature of its use. Here are the key exceptions:
Eligible Commercial Vehicles with Limited Private Use: Certain commercial vehicles, such as Utes, panel vans, and other vehicles designed to carry a load of one tonne or more, may be exempt from FBT if private use is limited. Private use must be minor, infrequent, and irregular. Examples include travel between home and work and incidental travel in the course of employment duties.
Emergency Service Vehicles: Vehicles used by ambulance, police, or fire-fighting services. The vehicle must be fitted with exterior markings indicating it is an emergency service car and equipped with a flashing warning light and horn, bell, or alarm.Home garaging of such vehicles is not considered private use, and FBT does not apply.
Minor Benefits: Benefits with a notional taxable value of less than $300, provided infrequently and irregularly. Examples include occasional use of a company car for a minor private trip.
Pool Cars: Cars that are shared among employees for business purposes and are not taken home by employees. The car must be used only for business purposes and garaged at the business premises when not in use.
Exempt Electric Cars: Certain electric cars may be exempt from FBT. The car must meet specific criteria set by the ATO for electric vehicle exemptions.
WHY do you need to register for FBT as a company owner when you don’t in a Sole Trader, Partnership or Trust Structure?
Because (as opposed to a Sole Trader, Trust & Partnership structure)- a Company is a separate legal entity from its directors and employees. This means the company itself can own assets, incur liabilities, and enter into contracts. The personal assets of the shareholders are generally protected from the company’s debts and liabilities.
Conclusion
Employees can claim expenses using the logbook or cents per kilometre methods but cannot claim for motorcycles, large-capacity vehicles, or typical home-work commutes. Self-employed individuals can claim actual business expenses for all vehicle types and must maintain detailed records and receipts.
For companies, Fringe Benefits Tax (FBT) applies to the private use of company cars, requiring annual reporting and payment. Some exceptions include certain commercial and emergency service vehicles, minor benefits, pool cars, and specific electric cars. FBT is necessary for companies because they are separate legal entities from their directors and employees, unlike sole traders, partnerships, or trusts.
For more help understanding how you can claim your motor vehicles (or FBT if you run your business in a company structure), don’t hesitate to get in touch with our team.
