How to claim your car costs at tax time

With the cost of petrol these days, anything you can do to reduce the cost of motoring is welcome.

Significantly, if you use your own car to help you earn taxable income (as part of your job, for instance), you can claim a tax deduction for any costs which you incur, including the cost of petrol but also such additional costs as insurance, servicing, repairs and so on.

There are two ways you can make this claim.

Two methods to claim car expenses at tax time

Cents per kilometre

You can claim a flat rate of 88c per kilometre for every business kilometre you cover.

You'll need to keep a diary of all work-related journeys so you can work out how many kilometres you've travelled for work. This method can only be used for claims up to 5000 kilometres per vehicle.

If you change your car part way through the year, you can claim 5000 kilometres for both vehicles.

Generally, if you travel more than 5,000 kilometres per year in a particular vehicle, you'll need to use the logbook method (below).

Logbook

This is a way of claiming the actual expenses you've incurred in running your vehicle for work, such as fuel, servicing, insurance and depreciation.

Deduction claims usually work our larger using the logbook method but the record-keeping requirements are more onerous. For a start, you'll need to keep a logbook - but only for a representative 12 week period.

In the logbook, you'll exhaustively record all your journeys - business and private - so that at the end of the logbook period, you can work out the proportion of business use for your vehicle.

That proportion can then be applied to all your car expenses over the year (and over the next four years too since, once you've done it, the logbook is good for five years).

Then, you'll need to keep records, such as receipts or invoices, for everything you spend on your motor vehicle, so you can claim the appropriate business percentage of that expense when you come to complete your tax return. So, don't throw away your petrol receipts!

So, that's how to make a claim. But when are you entitled to make a claim?

Driving as part of your job

If you're required to use your car for work, you are entitled to a deduction for the costs which you incur whilst at work.

This specifically excludes the cost of the commute from home to work, except in very limited circumstances, since this is regarded as private expenditure.

The only exception to that rule is if you are required by your employer to carry bulky tools in your vehicle which cannot be safely secured at work. Take great care on that point - the ATO looks very closely at such claims and disallows lots of them.

Typical situations where you might be able to claim petrol costs whilst at work include:

• Traveling between workplace sites during the working day
• Traveling directly from one job to another where you have a second job (provided you don't go home first)
• Traveling to a business related meeting with a client, supplier or prospect
• Traveling to a work-related course

Driving as part of your business

If you run your own business, you can claim a deduction for the cost of using your car in the business.

The rules are very similar to those that apply if you use your car as part of your employment. The significant difference is that if you run your business from home, your work-related journeys will be regarded as starting from home.

What about the cost of the car itself?

One of the most effective tax breaks of recent years has been the instant $20,000 asset write-off scheme for small businesses. In good news for small businesses, the Government has now confirmed that the measure will be extended to June 30, 2026.

Under that tax break, small businesses are able to claim an immediate tax deduction for all assets acquired for use in the business up to a value of $20,000. This could include anything from computer equipment to a coffee machine for the office kitchen to solar panels for the office roof.

The deduction isn't a one-off; all qualifying purchases will count, up to an aggregate maximum of $20,000. Motor vehicles are included within the scope of the scheme, so provided the vehicle you're interested in costs less than $20,000, you can use the write-off to claim an immediate tax deduction.

Here are some tips and traps on buying vehicles using the small business asset write-off:

The tax break is only available to small businesses

The definition of a small business includes all businesses with an aggregate turnover of less than $10 million.

Many vehicles will substantially exceed the $20,000 threshold

Assets which cost more than $20,000 do not qualify for the immediate tax break.

These assets must be written-off over their effective lives.  You may be able to get a second hand vehicle for less than $20,000, in which case, you can access the tax break since second hand assets are included.

If the car itself doesn't qualify, you may be able to purchase extra bits of kit for the car, or alternatively equipment to enable you to maintain the vehicle.  Cars which typically fall within the price range are new, smaller hatchbacks and second-hand vehicles of all types.

The $20,000 threshold is GST exclusive

If you see items quoted at GST inclusive prices, you can actually buy an asset priced at up to $22,000 (ie, $20,000 plus GST).

Don't let the generosity of the tax break override your commercial instincts.

This tax break is ideal if you were planning to purchase assets anyway or have a real business need to invest. But remember, there's no such thing as free money.

You have to outlay cold, hard cash in order to get the tax element back so make sure any capital purchases fit with your overall business plan. If you're not sure whether now is a good time to make a purchase or indeed whether to make a purchase at all, have a chat to your accountant who will be able to quantify the advantages and disadvantages for you.

Beware of private use

To claim the full deduction, the asset has to be used wholly in your business.

If there's an element of personal use, you can still claim the deduction but it needs to be pro-rated to reflect the element of personal use. So, if you spend $10,000 on an asset which is used 50% privately, you can only claim a deduction for $5000.

The trade-in is counted

Several commentators have suggested you could get the benefit of the $20,000 write-off on assets priced well above that by trading in a currently held asset, particularly in the context of motor vehicles.

For example, say you want to purchase a $30,000 vehicle and you trade-in your current vehicle for $12,000. The difference is $18,000 which is less than the write-off threshold. So, you can claim the deduction, right? Wrong.

The trade-in on the old vehicle is regarded under tax law as being part of the consideration paid for the new vehicle.

So, as far as the taxman is concerned, the price you've paid for the new vehicle is $30,000. That's above the $20,000 threshold so the instant asset write-off is not available and the whole $30,000 will have to be written off over the estimated life of the vehicle.

Getting your tax return done

If you use a tax agent to prepare your tax return, as well as claiming the cost of getting the tax return prepared, you can also make a claim for any travel expenses you incur in getting to and from your tax agent, including petrol if you drive to see your agent.

No matter whether you're driving for work, to visit an investment property or to get your tax done, you need to use either the cents per kilometre method or the logbook method.

Whichever method you choose needs to be applied to all your tax-deductible car use and if you choose the cents per kilometre method, the 5000km limit applies to all tax-deductible use.

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