The expense of owning and maintaining a car can be one of your most significant costs. Fuel prices are constantly rising, insurance premiums are on the up, and purchasing a car is more expensive than ever. Combine all this with the fact that your car’s value begins to drop as soon as you drive it off the lot, and you’ve got a fairly expensive asset on your hands.
So, with all this in mind, it’s important that you get the most out of your car, particularly when it comes to claiming every tax deduction possible when it comes to using your car for work related purposes.
What Constitutes a Work Related Car Expense?
Before we look at what constitutes a work related car expense, the first thing that needs is be established is car ownership; when it comes to claiming work related car expenses you must personally own, have leased, or have hired the car used for work purposes. If your boss has provided you with a car as part of your employment contract, you cannot claim any expenses incurred.
Types of Trips that Can be Claimed as a Work Related Car Expense
To put it simply, a work related car expense is any expense that you incurred while using your car for an income earning activity.
There are certain types of work related business trips that you can claim, these may include:
- Trips between two separate workplaces, such as two franchise locations for a fast food restaurant chain owner.
- Trips between your primary and an alternative workplace, such as the gym and a private appointment with a client, if you are a personal trainer.
- Travel to and from training seminars, conferences, to pick up supplies, and so on, would all qualify.
You cannot claim trips between work and home unless:
- You have to carry bulky work equipment and tools that cannot be safely stored at work (ATO criteria applies).
- Your home is considered your base of employment—you start work at home before travelling to your working locations.
- You have to travel to several places of employment before returning home.
You cannot claim a trip between work and home even if:
- You travel between work and home more than once a day.
- There is no public transport available.
- You were on call.
- You do shift work or had to work overtime.
- You completed work-related tasks between your home and your workplace, such as dropping off mail or buying stationery.
- Your home was a place where you ran your own business and you travelled directly to a place of employment where you worked for somebody else.
How To Work Out and Claim Car Expenses on Your Tax Return
There are four methods that the Australian Taxation Office (ATO) allows for calculating car related expenses. If you are eligible to use all four of the calculation methods, then you can use the one that will provide you with the largest tax deduction. The four methods are:
Cents Per Kilometer
This method is the most common method of claiming motor vehicle expenses in a tax return. It uses a set expense rate for each kilometer travelled for income earning purposes. The expense rate is set in relation to your cars engine capacity and you can claim a maximum of 5,000 business kilometers per car using this method.
Whilst you don’t need to keep written evidence if you are using this method, you do need to demonstrate how you worked out the business kilometers in relation to the total kilometers travelled.
To work out your claim, multiply the total business kilometers travelled by the kilometer rate allowed. For example, 3,800 km at 75c per km will enable a tax deduction of $2,850 to be claimed in your tax return.
Keep in mind that as of next year (so for all tax returns for the 2015-2016 financial year onwards), the ‘Cents Per Kilometer’ method has been updated by the Federal Government; the existing three rates that are based on engine size have been abolished. Instead, a flat rate of 68 cents per kilometer applies to all makes, models and engine sizes.
This method allows you to make a claim based on the motor vehicles’ business use percentage. This method is recommended for individuals who use their vehicles for regular business activities on a daily and weekly basis. For example, trades people, consultants, and sales and business development roles, and so on.
To work out the business percentage you must keep a logbook and record odometer readings of your business trips for a 12-week period. You should also keep written evidence of all other costs such as registration, insurance and repairs and maintenance. The annual cost of fuel can be estimated based on total kilometers travelled by the vehicle during the year.
Your logbook must show:
- When the logbook starts and ends and the odometer readings at these times.
- Total number of kilometers travelled during the logbook period.
- Total business kilometers travelled (total of all the separate trips).
- Make, model, engine capacity and registration number of the car.
Your logbook is valid for five years unless your working situation changes whereby a new log book may be required. Logbook entries must be made at the end of the journey and must record:
- The date the journey began and ended.
- The odometer readings at the start and end of the journey.
- The kilometers travelled on each eligible business related day.
- The reason for the journey.
We have a free, downloadable Vehicle Log Book template.
To work out your log book percentage for business use of the vehicle simply divide business kilometers by total number of kilometers travelled during the log book period. That percentage of all the motor vehicle expenses for the year can then be claimed as a tax deductible expense in your tax return.
For more information on this calculation method, take a look at How to Keep a Vehicle Log Book.
Other Calculation Methods
At the moment, there are also another two methods that can be used to calculate your work related car expenses: 12% of the original value, and one-third of actual expenses. However, in the 2015 Federal Budget, the Australian Government has abolished both these methods. So for all tax returns for the 2015-2016 financial year onwards, the following two methods will no longer apply.
12% of the Original Value
To use this method, you must have clocked up more than 5,000 business kilometers in an income year. This method allows you to claim 12% of the original cost of purchasing the car or 12% of the car’s market value from when you first leased it. Like the cents per kilometer method, you don’t need to keep written evidence of expenses incurred, but you do need to demonstrate how you determined the business kilometers percentage.
To work out your deduction, multiply the cost of the car by 12% and include that amount in your tax return.
One-third of Actual Expenses
This method is also only available to individuals that have travelled more than 5,000 business kilometers. If you only owned the car for half the year you can use this amount if you would have reached 5,000 business kilometers in the course of a year.
The one-third of actual expenses method allows you to claim a third of all expenses, including any expenses incurred during the private use of your car.
You must keep receipts in order to claim under this method. Fuel and oil costs can be claimed by estimating expenses incurred based on odometer readings. You must also keep records the outline the make, model, registration number and engine capacity of the car.
To work out your claim, add together all the expenses incurred (fuel, oil, registration, loan interest, repairs and maintenance, decline in value, and so on) and divide the total by 3.
Contact Online Tax Australia: Your Reliable, Experienced Australian Tax Agent
If you’ve been searching for a reliable, experienced Australian tax agent, then contact the friendly team of professionally qualified, accountants at Online Tax Australia today:
- Call us on (03) 9852 9051
- Email us at email@example.com
- Location: Level 1, 278 High Street, Kew