There are three methods for calculating ATO car expense deductions:
🚗 The “cents per km” method
🚗 The “logbook” method
🚗 The “actual costs” method
➡️ Whether you’re an employee, a sole trader, or part of a partnership, you can opt for either the “cents per km” or “logbook” method if you drive a car (i.e. – a vehicle that carries fewer than nine passengers or less than a tonne).
➡️ If you operate a different type of motor vehicle such as a motorcycle, van, or one with a load capacity exceeding a tonne, the “actual costs” method is mandatory.
➡️ Companies seeking to deduct ATO car expenses must also utilise the “actual costs” method.
Regardless of the method chosen, maintaining a comprehensive vehicle log book is essential!
Tax-Deductible Car Expenses
All expenses related to maintaining and operating your vehicle for business purposes are tax-deductible.
These include:
- Fixed costs: registration, insurance, motor vehicle loan interest, lease payments, depreciation
- Variable costs: maintenance, repairs, fuel, tire expenses, oil changes
- Tolls and parking fees can also be claimed as deductions.
- Allowable Kilometres for Tax Claims* (which will vary depending on the chosen ATO car expense method as touched on above).
Car expense deduction methods – more detail
Under the “cents per km” method, you can claim up to 5000 kilometres per fiscal year.
For the “logbook” or “actual costs” methods, there are no set limits on the kilometres eligible for expense claims.
“Cents per km” Method
The simplest way to calculate your car expenses deduction is the “cents per km” method. This method provides a standardised rate that includes all car ownership and operation costs. Your claim is calculated by multiplying the business kilometres driven by the annual rate. Using this method, you can claim up to 5000 kilometres per tax year. The rates are determined for each fiscal year; for instance, the 2023/2024 rate is set at $0.85 per business kilometre, compared to the previous year’s rate of $0.78 per business kilometre. While a detailed logbook isn’t required, you must be prepared to demonstrate your deduction calculation if requested by the ATO.
“Logbook” Method
The “logbook” method involves more effort but can lead to higher deductions, especially if you exceed 5000 business kilometres in a fiscal year. By maintaining a compliant logbook, you can claim all the kilometres driven during the year. This method’s deduction is based on the work-related percentage of your car expenses. It’s important to note that capital costs such as the car’s purchase price and loan principal aren’t eligible for claims, but depreciation can be claimed. You need to determine the work-related percentage of your total kilometres, and a logbook covering at least 12 consecutive weeks must be maintained. For consistent deductions, maintaining a year-round logbook is recommended if your driving patterns vary throughout the year. While receipts are needed for most car expenses, fuel and oil costs can be estimated based on odometer readings if receipts are unavailable.
“Actual Costs” Method
The “actual costs” method is similar to the “logbook” method but demands more rigorous record-keeping. Key differences include the necessity of receipts for all expenses, including fuel and oil, and the continuous maintenance of a logbook to calculate the business vs. personal use travel percentage. Apart from these distinctions, the expense calculation process is identical to the “logbook” method.
To be eligible for ATO car expense claims, travel must be exclusively work-related.
Examples of such travel encompass:
- Attending off-site meetings
- Traveling to conferences
- Delivery or collection of items or supplies
- Direct travel between two jobs without returning home
- Commuting from the primary workplace or home to an alternative work location (e.g., a client’s office)
- “Itinerant work” involving multiple work locations in a day
- Typically, commuting from home to work isn’t claimable, barring a few exceptions, such as transporting bulky work-related equipment that can only be conveyed by a vehicle.
- Reimbursement by Employers
- If your employer has reimbursed your car expenses, you cannot claim them as deductions in your tax return to prevent duplication. An exception exists if you receive a car allowance rather than direct reimbursement. A car allowance is treated as taxable income, enabling you to follow one of the methods outlined above for claiming your tax deduction.
At Freshwater Tax, we are committed to having you in the best possible tax outcome for your unique situation. As such, we will always select method above that best works for you (pending the availability of your evidence). For further queries on the claiming of motor vehicle expenses, don’t hesitate to get in touch with our team.
