How to get tax deductions on car expenses
Car expense deductions are one of the most commonly filed claims by individuals according to the Australia Tax Office (ATO).
If you own, hire, or lease a car, you may be eligible for claiming tax deductions. If you borrowed a friend’s vehicle for business purposes, you may still file for car expense deductions for spending on fuel.
Counted for claims
You can request for a deduction if you use your own vehicle to perform work-related activities. Below are some examples of job-related operating costs counted for a deduction:
- Delivery of parcels or picking up office supplies
- Carrying heavy tools and equipment
- Attending meetings, seminars, and conferences
- Traveling between two separate offices
- Going from your usual office to another workplace and then back to the office
- Traveling to a client’s office or to another workplace before you go to your usual office
- Doing itinerant work like surveillance
Allowance for car expenses is counted as part of your computable income and must be indicated upon filing for tax returns.
Not counted for claims
If the operation and travel costs result from private use, they can’t be considered for claims. This includes traveling from home to the office and back.
How to compute for deductions
Back in 2015, there were four methods you can use to compute for deductions. Recently, the methods were simplified and reduced to two methods which are discussed below.
Cents per kilometer method
You need to record how many kilometers of work-related travel you’ve done throughout the financial year. The maximum you can claim for deductions is 5,000km of travel. You can claim up to 66c per kilometer of travel.
The ATO may request for an explanation how your travels are business-related. You don’t necessarily need a formal written evidence. A diary-like record is a considerable proof to back your claims.
For example, John works as an admin officer for a small company. Every day, he travels to 4 different locations using his car to collect goods, deliver parcels, buy equipment, and do banking. He travels approximately 15km each day for these work-related activities.
Computing for claims, here’s what he can get.
15km x 5 workdays = 75km per week
75km per week x 48 weeks (John has 4 weeks of leave per year) = 3600km
3600km x $.66 = $2376.00
John can claim a deduction for car expenses amounting to $2376.00 on item D1 of his tax return.
If you think you’ll exceed the 5,000km limit of the method above, you need a written evidence for all the expenses in excess of the said limit. The logbook should contain at least 12 weeks of continuous record showing your odometer readings and operating costs to back your claim.
Below is a simple guideline to secure the eligibility of your claim:
- You should be using your own car
- The logbook process needs to be completed at least once every five years or less
- Record all personal and business-related trips in the logbook
- Keep all receipts for all car-related expenses including registration, servicing, fuel costs, insurance, depreciation costs, car loan costs and its interest, and other operating costs.
Claims are based on the percentage of work-related expenses in using the car. The price you purchased your car, the amount of principal borrowed to acquire it, and any improvement and modification costs are excluded from tax deductions.
For example, Jane is an admin officer for a small business. She keeps a logbook recording 12 weeks of her activities, both personal and business-related, which involve the use of her car.
To get the work-related percentage she used her car for, she recorded the total distance traveled on business-related trips and computed the car’s total mileage from the time she started recording on her logbook. She then divides the business-related mileage by the total mileage to get the work-related percentage.
Traveling a total of 500km for the whole 12-week period, her records show that 400km of this is work-related. Therefore,
400km work-related trips ÷ 500km of total mileage = 80%
Adding all the receipts of her car expenses, both for personal and business purposes, she got a total of $8,000. Multiplying this by 80%,
$8,000 x 80% = $6,400
This means Jane can claim up to $6,400 of deductions on item D1 of her tax returns.
Things to remember
As discussed above, you can’t claim expenses for traveling back and forth to your house and office because this is considered as private use of the car. Also, you can’t file for tax returns if you’ve been reimbursed by your employer for the same amount which means they’re giving allowance for your expenses. You can only file claims when you paid for the expenses yourself.
Tax deductions on car expenses can save you a lot of money if you have the diligence to record everything to prove your claims.