Car and tax deductions
Do you use a car for your business?
Are you aware that you can claim car expenses if you use your car for business purposes? However, there are only two ways by which you can determine how much deduction can be claimed. One is the logbook method and the other is cents per kilometer method.
If you use the logbook method, you can work out the business use percentage for your car and claim that percentage for all your expenses like insurance, registration, fuel, repairs and maintenance and even depreciation.
The logbook has to be kept for 12 weeks and it remains valid for a period of 5 years. In order to get the best deductions, it is best to make a logbook and retain it for 5 years.
If you have missed making a log book, you can only claim up to a maximum of 5000 kilometers in one financial year. The ATO allows a fixed sum per kilometer. The amount for 2020 is 72 cents a kilometre. This means that you can claim no more than $3,600 in one financial year.
Making a logbook is painful. Officeworks have a logbook with them, or you can even make one on excel.
Have you tried the free ATO app which is easy to use? Here is a link if you wish to check out.
How to make a logbook for tax purposes
Most of my clients think that they only need to record the business travels in the logbook. That is not correct. If you do that, your logbook will become invalid, and you will have to end up claiming the cents per kilometres only.
You have to note every travel made for a 12 week period. This means that private travel has to be noted as well.
Please remember, travel from home to workplace is a private travel. However, if you have to go shopping from your workplace for your business, attend any seminars or conferences, visit your clients’ premises, or make any deliveries, that all counts as business use. Travel out of town to get any deliveries or attend trainings or visit clients is all business travel. If in doubt, check with your accountant.
Once you record all the travel for 12 weeks, total the kilometers made in every journey. Now work out the percentage of business use by using the following formula:
Business use percentage is = Business kilometers x 100
For example, Lyn is a farmer and visits the town for purchases for the farm once every week. That trip is 50 kilometers both ways. She runs a total of 2500 kilometers in 12 weeks of which 2000 kilometers are business trips. Her business percentage will be:
2000 x 100 = 80%
Now Lyn can claim 80% of her car expenses as business use till the time her use does not change.
She can follow the same percentage even if she buys a new car.
What is business use of a car?
As I said, travel from home to work is private travel.
These are the examples of travel which is counted as business use
You can claim a deduction for work-related car expenses if you use your own car in the course of performing your job as an employee – for example, to:
carry bulky tools or equipment (such as an extension ladder or cello) that your employer requires you to use for work and there is no secure storage available at work
attend work-related conferences or meetings away from your normal workplace
deliver items or collect supplies
travel between two separate places of employment, but not if one of the places is your home (for example, when you have a second job)
travel from your normal workplace to an alternative workplace (that isn't a regular workplace) and back to your normal workplace or directly home
travel from your normal workplace or your home to an alternative workplace that is not a regular workplace – for example, a client’s premises
perform itinerant work.
What if I use someone else’s car? Can I still claim a tax deduction?
The answer is yes. Supposing you use your parent’s car or your partner’s car for business or work, you should keep a record of the expenses you have incurred, like fuel or repairs.
What if I don’t have a car and use a ute?
That is a funny thing! The tax office defines a car to be any vehicle which carries less than 9 passengers and has a carrying capacity of one tonne or less.
Technically speaking a ute is not a car and neither is a minivan. However, if you are using a vehicle as for business purposes, you are OK to claim a deduction. Of course, as with everything else, the ATO requires you to meet the test of reasonability.
What is private use and what trips I can’t claim?
Travel between home and office is private. That is because its your decision where you choose to live. There have been cases when people lived on farms and travel by airplane to their workplace and tried to claim deduction for their planes. In order to prevent such misuse, this deduction was removed.
For motorcycles and other vehicles that are not cars, you may not be able to claim “car expenses” but can claim under “travel expenses” on your tax return.
What if my car is leased?
You can claim a deduction for expenses related to leasing your car under cents per kilometre or logbook method.
If your family member owns a car but you use it, you could claim the deduction if you paid all the expenses.
Can employees claim car deductions?
Yes, provided they are using their car for work related purposes.
Travelling from home to your workplace is a private trip and you cannot claim a tax deduction for that. This is because where you choose to live is your personal decision.
A logbook has to be maintained to show the business use percentage of your car. Or you can use the cents per kilometer method.
Sometimes, your employer may give you an allowance for the use of your car for work related purposes. You can claim a tax deduction for the allowance received if you have actually used the for work related purposes. Remember, any allowance received has to be declared as income.
The logbook method vs the cents per kilometer method. Which gives a better outcome?
That will depend upon your car and how much do you use it.
Lets say that you have only 500 kilometers of business use in a year and 5000 km of private use. In such a situation, cents per kilometer will be the way for you. You will get a tax claim for $360 (500 km * 72c)
In another example, you have 1500 kilometers of business use and 2000 kilometers of private use. Now your business use percentage is 75%. You will be able to claim through both cents per kilometers and logbook method, but it will be worthwhile checking which method gives you a better tax deduction.
Lets look at this calculation:
That makes a total of $10,350. 75% of this amount is $7,762.50.
However, the cents per kilometer
method only yields you $1080 (1500 km * 72 c)
You are much better off using the logbook method here.
As an accountant, we do both calculations for clients and work out which gives them a better result. You can pick the method which gives you a better tax deduction.
But remember here, that if you don’t have a logbook, you cannot apply the logbook method.
Also, the logbook has to kept for 12 weeks at a stretch and lasts you for 5 years even if you change your car.