Are you an Australian taxpayer who uses a vehicle for work or business purposes? If so, you may be eligible to claim deductions for your motor vehicle expenses on your tax return. However, there are important differences in how business and individual taxpayers can claim these expenses, as well as specific requirements and potential pitfalls to be aware of. Read on to learn more about motor vehicle expense claims in Australia.
Business vs. Individual Taxpayers
The first thing to understand is that there are different rules for claiming motor vehicle expenses depending on whether you are a business or an individual taxpayer. Business taxpayers, depending on their structure, can claim a broader range of concessions that incentivize greater investment in their business. Regardless of who seeks to make a claim, motor vehicle expenses such as fuel, repairs and maintenance, insurance, and depreciation can generally be claimed if the vehicle is used for work; the important point though is how these expenses can be claimed.
With the amount of methods available to calculate and claim these expenses, it’s no wonder where the confusion stems from. To make matters even worse, some methods have varying rates and eligibilities which change year on year. In effect, this means that there are numerous motor vehicle expense methods that can be picked, depending on the financial year of use. The Set Rate Method, the 1/3 Expenses Method, the 12% Method, the Logbook Method, the Actual Costs method; if you’ve heard of any of these then welcome to Part 1 of a 6-part series - a series that we will not attempt to write, but will nonetheless provide a brief commentary on.
Definition of a Car
Before we dive into the nitty gritty details of motor vehicle deductions, a clear distinction needs to be drawn around the ATO’s definition of a car. This is pertinent as if you are driving something that is not a car, then you will be unable to use certain methods to calculate your motor vehicle deductions. Put simply, the ATO define a ‘car’ as:
A motor vehicle (this excludes motorcycles and other similar vehicles),
Having a carrying capacity of less than 1 tonne
Having a carrying capacity of less than 9 passengers
If you satisfy the above 3 requirements, then your motor vehicle is classified as a car, and you can use the current methods available for calculating your claim. If you fail any, or all, of the above requirements, then your motor vehicle is classified as an ‘Other vehicle’ and you are only able to utilise the Actual Expenses method for calculating your motor vehicle claim (more on this later).
Individuals’ vs Business Structure
Individual employee taxpayers have the flexibility to select their method for claiming motor vehicle expenses related to the work-related use of their vehicle, such as travel between two separate workplaces, client visits, or trips to attend work-related seminars or training courses. Personal use of the vehicles cannot be claimed. The method available for business structures such as a company, trust, partnership or sole trader is limited in using the Actual Costs method, which is explained further below.
The below methods are methods that are no longer in effect as of 1st July 2015. They are included in this article as they are still valid methods for financial years before the 2016 financial year.
12% Car Cost Method
Where the business kilometres are at least 5,000km’s then you are entitled to make a claim of 12% of the cost of the car. While no logbook or diary evidence need to be kept, there must be a reasonable way of calculation the number of kilometres that was driven. The beginning and ending odometer readings should be documented as well for integrity purposes.
Except for proof of the car cost when it was purchased, and the above odometer readings, this method has no additional substantiation requirements.
1/3 Expenses Method
Where the business kilometres is at least 5,000km’s then you are entitled to a deduction of 33% of all motor vehicle expenses. While no logbook or diary evidence need to be kept, there must be a reasonable way of calculating the number of kilometres that was driven. The beginning and ending odometer readings should be documented as well for integrity purposes.
Receipts/written evidence must be kept in order to claim the relevant car expenses though.
The below methods are currently in full force and are available for taxpayers to utilise to work out their motor vehicle expenses deductions. The decision on which method a taxpayer should choose is entirely up to the individual. Generally, the method that gives the best result will be chosen as the method used. Just because you have used one method in one financial year, does not mean you have to use the same method in the next financial year, although when you dispose of the car it can create a bit of a compliance problem.
Cents per km Method
The cents per km method is the easiest and most used for individual taxpayers under salary/wages. It is claimed by multiplying the number of kilometres travelled for work purposes by the set rate per kilometre established by the ATO. The rate is adjusted by the ATO every year or so to reflect the higher cost of living.
The assumption of this deduction is that the set rate is supposed to make a generalised claim for all motor vehicle expenses based off the amount of kilometres driven for work purposes. The private use of the vehicle is inherently tied up within the set rate, so no further apportionment is necessary. Basically, this means that for the 2022 financial year, the ATO deem that on average when a person drives a car for work purposes, they are approximately using $0.72 per kilometre which is supposed to cover registration, insurance, repairs, maintenance, services, tyres, lease payments etc. I.e. no other or additional expenses can be claimed on top of the set rate.
The proof required to claim this method is limited to a reasonable calculation of the amount of kilometres driven having a diary or log of trips for the year is highly recommended though. From an administrative point of view this method is the most simple and straightforward as no additional substantiation is required.
The only drawback to the cents per km method is that a maximum claim of 5,000km is imposed on this method. This means that if you drive more then 5,000 kilometres then you can only claim 5000 kilometres at the set rate. Many taxpayers who drive over this amount still prefer to claim this method however as the administrative burden is less then other methods. Proper prior planning though can make a large difference, especially when we compare the other methods of deducting motor vehicle expenses.
Another method of calculating your motor vehicle deductions is the logbook method. This method is a lot more inclusive and specific on how much the vehicle can be claimed and generally the deductions from this method will outweigh the deduction from the cents per km method. In order to claim this method, you guessed it; you will need to keep a logbook for a consecutive period of 12 weeks. This needs to be accurate, detailed and complete for the ATO to accept it as substantiation. Put simply – No Logbook = No Claim. Numerous individuals will come to me with the following phrase:
“I use my car entirely for work purposes, so I don’t need to keep a logbook”
If I don’t see a logbook, then I don’t make the claim. Even if you only, completely and definitely use your car for work trips, the ATO will still need a 12-week logbook showing a work percentage use of 100%. The number of claims I have seen rejected due to an incomplete or non-existent logbook should be proof enough that the ATO mean business on this one. Think of the ATO like vultures in the desert – they will be keenly searching for anything that looks out of place to see if they can get anything out of it.
For information on how to keep a correct and detailed logbook, see our other article to keep up to date. The purpose of the logbook is to provide the individual with a percentage that their car is used for work. It does this by comparing the kilometres driven for work against the total kilometres driven in a 12-week period. All the relevant motor vehicle expenses are then apportioned against this percentage which provides the taxpayer with a total deduction.
Two things to keep in mind with this method:
You can only claim expenses that are relevant to the period you used the car for work purposes. If you start using your motor vehicle in December 2022 then you can only include expenses from December 2022 onwards. This especially applies to depreciation on the vehicle.
2. The 12-week logbook must cover a representative 12-week period. This means that you should do the logbook in a 12-week period that accurately depicts the average usage of the vehicle for the motor vehicle. This presents a problem where an individual’s work is seasonal or varies substantially between periods. In these cases, numerous logbooks may be necessary, or a time factor should be incorporated so that the claim is accurate and detailed.
Obviously, the main piece of substantiation required for this method is a valid 12-week logbook. But taxpayers are still required to maintain adequate receipts and invoices for other purchases relating to their car. Registration, insurance, fuel, services and maintenance are all examples of deductions that require substantiation. There is an exemption available for fuel receipts (because no one wants to go through over 2,000 fuel receipts) where you are able to estimate the cost of fuel based off averaged fuel prices and actual kilometres travelled. You must keep records of the beginning and ending odometer readings to access this exemption though.
The final method to consider is the Actual Costs Method which sees a claim made for the actual expenses incurred in keeping, using and maintaining the motor vehicle. This method is for all sole traders, partnerships, companies & trusts. It is also available for all ‘other vehicles’ as described at the beginning of this article. Just like any other expense, the taxpayer is required to have actually incurred the cost and can only claim the portion that relates to the income producing activity. Looking at this method from the outside, it is basically the same as the logbook method as it requires substantiation to prove what percentage your vehicle is used for business verse private use.
5 Common Pitfalls & Tips
1. Claiming personal trips as work related trips
You can only claim trips that are directly related to work or business activities. Unfortunately, the ATO do no see driving to your regular workplace as a work-related trip and is thus non-deductible in most cases. There are cases where you can claim these trips, but they are dependent on other variables such as carrying tools of trade, transient workplaces amongst other requirements.
2. Claiming tolls and parking
Whenever we see a client hand over their documents and spreadsheets to begin preparing their return, we almost always see the tolls and parking expenses listed motor vehicle expenses. Don’t be alarmed when you see these expenses re-directed to D2 Travel Expenses – where they are meant to be claimed.
3. Travelling for Study/Education
The ATO see education and study expenses as private expenses and by extension any travel involved with that are also non deductible. This is different though where a firm connection can be made between your current employment and the current study you are undertaking. The motor vehicle expenses you incur in travelling to the place of study from your home and back again may then be a tax-deductible trip. So also, could a trip from your place of work to your place of study and back again be likewise claimed. But be careful though, as only the first leg of the trip can be claimed if you are travelling from your home to your place of study to work.
4. The Set Rate fluctuates.
We once had a client who was claiming the same set rate numerous years in a row; they hadn’t realised that the set rate had actually increased, and they were missing out on precious motor vehicle deductions. Keep tuned to what the latest rate so you can be across this. This is also a caution, that when preparing a prior year tax return, the set rate in that year must be used, not the set rate in the current year.
5. Selling/Disposing of cars
Upgrading cars are a great way to get the car of your dreams, especially when you take care of the car you own. Often individuals will sell, or trade-in their car without regard to the tax implications of those transactions though. If you’ve made a claim for motor vehicle expenses in your tax return and end up disposing of that car, then you’re up for some motor vehicle disposal adjustments. These cases range from the simple calculations to the “pull-your-hair-out-nightmare” calculations. Record keeping is the name of the game in this scenario as valid records will save you some big $ in accounting fees.
In conclusion, claiming motor vehicle expenses can be a complex process, but with the right knowledge and documentation, it can also be one of the greatest ways to maximise your tax return. Whether you are a business or individual taxpayer, it is important to understand the specific rules and requirements for claiming these expenses, and to keep accurate records of all related expenses. If you are unsure about your eligibility to claim motor vehicle expenses or need assistance with your tax return, consider consulting with a qualified tax professional. With the help of an experienced accountant, you can make sure that your motor vehicle expense claims are accurate and complete, so you can focus on the road ahead. At Maurer Taxation, we specialise in helping Australian taxpayers navigate the complex world of taxation, including motor vehicle expenses. Contact us today to learn more about our services and how we can help you maximise your tax return.
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