Geographically, Australia is different to most of the world. Given that we live in a large country yet only have a small population, owning a car is essential for most of us. And it makes sense that many of us not only use our cars for our personal lives, but also in our work/business to varying degrees. So naturally the question often arises, what can I claim for my car for tax purposes (if anything)? The answer to that question depends on what type of car you drive, what you use it for and what sort of records you have. For the purposes of this article, I’ll assume that you either own the relevant car or have access to it under a finance arrangement.
Is what you drive actually a “car”?
This might seem like a dumb question, but the ATO’s definition of a car is relevant for what and how you claim at tax time. The ATO differentiates between cars and other vehicles:
- Cars are motor vehicles (excluding motorcycles/similar vehicles) which are designed to carry a load of less than one tonne and less than 9 passengers.
- Other vehicles are everything else.
So, what most people think of as a car will usually fall under the definition of a car, but cars also include some smaller/double-cab utes. Most larger utes, motorcycles, trucks, heavy vehicles, buses, etc. will be classified as other vehicles. Tax deductions can be claimed for cars using either the cents per km method or the logbook method. Other vehicles can only use the logbook method to claim a tax deduction. I’ll explain the differences between the cents per km and logbook methods below.
Cents per km method vs logbook method
There’s only two methods of calculating your motor vehicle tax deduction:
- Cents per km method. This is easy to understand and apply. The ATO provide a set rate each financial year ($0.72 per km for the 2021 FY) which you can multiply by the deductible km that you travelled. You normally don’t need detailed evidence to substantiate the amount of km you claim, however you may need to explain the figure if the ATO come knocking. The only downside is that this method is capped at 5,000 deductible km per car per year.
- Logbook method. The logbook method involves keeping a detailed record of all your km for at least 12 consecutive weeks. This logbook can be via paper, excel, a tracking app, etc. It needs to show each trip, how many km were travelled and for what purpose. Once the 12 weeks are up, all trips are then tallied to calculate a deductible percentage (e.g. 80% work use). The deductible percentage is then applied to all the motor vehicle’s costs – i.e. fuel, registration, insurance, repairs, loan interest, depreciation, etc. The logbook can be applied for up to 5 years, unless your circumstances significantly change before that. After this, a new logbook will need to be kept to continue to claim a deduction using this method.
Which is better – the cents per km method or logbook method?
It really depends on your circumstances as to whether the cents per km method or logbook method will work better for you. There’s no doubt that the cents per km method is easy to apply, and it often results in a good deduction if your deductible km are up to around 5,000. On the flip side, the logbook method is administratively painful to claim, however it can result in a larger tax deduction. Generally, the logbook method only produces a better tax deduction where you drive a lot of km and have a high work/business use on your motor vehicle. Otherwise, you should be able to achieve a similar tax deduction using the cents per km method. If you do keep a logbook, you’re able to choose the either the cents per km or logbook method each financial year.
Some other things to consider
There’s a couple of other relevant things to think about when considering motor vehicle travel in general:
- If you receive a car/motor vehicle allowance, you’re required to declare that allowance for tax purposes. This means that you pay tax on that allowance. However, you’re also entitled to claim a tax deduction for any deductible travel you did in the corresponding period. This means that you might end up with a bigger (or smaller) motor vehicle deduction than the motor vehicle allowance you received.
- It’s worth pointing out that regardless of whether you claim a tax deduction using the cents per km or logbook method, travel between your home and workplace is generally not deductible. There are some exceptions to this (e.g. if you’re required to transport bulky tools or your home is your base for your work), however most people will only be able to claim motor vehicle deductions for use of their personal car within their working day.
- If you own your car through a novated lease, you aren’t entitled to claim anything for tax purposes. The nature of a novated lease means that technically the employer owns the car (until the end of the lease/employment). This means the employer is entitled to the tax deductions for the various car costs. It’s normal for the employer to factor these car costs into the employee’s salary package.
- There’s a tax disincentive for claiming car costs on expensive cars. If you use the logbook method, you’re able to claim depreciation (i.e. some of the cost of the car itself) each year. The ATO places a limit on the maximum value of a car that can be depreciated. For the 2022 FY, this limit is currently $60,733. So, for example, if your car costs $100K, you can only claim depreciation on the first $60,733.
Recap
When claiming tax deductions for motor vehicle costs, it’s important to firstly figure out if what you’re driving falls under the definition of a “car” or not. If you are driving a car, you then need to figure out whether the cents per km method or logbook method is more suitable for you. If the logbook method will be more suitable for you, you need to make sure you maintain a valid logbook and have the relevant records to track all your motor vehicle costs. It’s easy to get this stuff wrong – engaging an accountant will likely be worthwhile if you have deductible work/business motor vehicle costs.
