Tax may be boring, but a healthy tax return isn’t! As a business owner, there are a lot of tax perks when it comes to claiming tax deductions for your work-related car expenses. It pays to understand what they are and how you can claim them.
The difference could mean hundreds of dollars’ difference in your tax refund!
A little bit of knowledge does go a long way. Here, we’ll share our seven top car expense tax tips.
Tax tip #1: bulky tools
Depending on what you do to earn an income, you may have to carry bulky tools and equipment to do your job. This applies to jobs like:
- Tradies
- Equipment salespeople
- Musicians
There may be a few tax deductions to pick up here.
Your ‘tools of trade’ must be bulky and cumbersome, have no other practical way to transport or access them at your workplace, and have no opportunity to securely store them at your workplace.
Generally, bulky tools and equipment weigh in excess of 15 – 20kg and are hard or awkward to carry.
Pro tax tip: Did you know that, in most instances, travel between your home and work is not a valid tax deduction? Wait … what? There are only a few exceptions, but generally the Australian Taxation Office (ATO) considers such trips as personal!
Tax tip #2: travel between workplaces
Your travel from home to work and back again might not be tax deductible, but once you’re at work and you’re asked to use your car – bring it on and record those trips!
This includes travelling:
- Between separate workplaces, from office to office or between building sites
- To visit clients and customers
- To conferences, seminars or your study course that you take to improve your skills for your current job
All these can be claimed.
Tax tip #3: parking
You may be required to drive for the course of your work, and that also means you have to use a road and park your car when you get there. Pick up those tax deductions on the way!
Road and bridge tolls and parking fees are acceptable tax deductions.
Don’t forget to claim these expenses as travel-related expenses though, and not car expenses. Still claimable though! Cha-ching.
Pro tax tip: Hey lead foot Larry, did you pick up a speeding or parking fine during your work travel? Sorry, the ATO doesn’t allow fines of any kind as tax deductions. That expense and the points you lose are a private expense.
Tax tip #4: running costs
The running costs of your car are where you’ll pick up the most claims. Running costs include:
- Petrol and oil
- Registration
- Servicing and repair costs
- Car insurance,
- Interest on car loans
- Lease payments
- Depreciation
There are items that can’t be claimed as car expenses. These include the purchase price of your car (use the instant asset write off scheme or depreciate the cost to claim that expense), salary sacrificed expenses, expenses that are reimbursed by your employer or any private travel. Novated leases through your employer are also not claimable.
Pro tax tip: If you provide cars to your staff, you’ll be able to claim the above costs on their cars too.
If you use the car for both business and private travel, you’ll need to apportion your costs and claim only the business use. To make sure you satisfy your business vs private portion to the ATO, you’ll need to use a logbook.
Tax tip #5: claim expenses the right way
The ATO wants three key things to prove your expenses. Car expenses are no different.
- The expense you claim must be a work expense only
- You must already have paid for the expense
- Most important – you must be able to prove your claim
This is where your logbook comes in. Here, you’ll detail your work journeys, odometer readings, date and purpose of your trips. Back it up with receipts of course.
Your logbook is used to claim your car expenses using two methods:
Cents per kilometre method
You’ll be able to claim up to 5,000 kilometres of business travel, per car.
The current rate (from 1 July 2020) is 72 cents per kilometre.
This method allows you to pop all of your running costs into one bundle. This includes depreciation.
If you want to claim more than 5,000km per vehicle, you’ll need to use the logbook method.
Logbook method
Using the logbook method, you’ll need to record certain facts of your travel, including:
- When the logbook period begins and ends
- The car’s odometer reading at the start and end of each journey
- Your overall reading for the time of the logbook
- Kilometres travelled
- Reason for your journey
Your odometer reading at the beginning and end of each financial year are also required to see how many kms the car has travelled in total from year to year.
Only running costs and depreciation can be claimed using this method.
You won’t have to keep track of each and every journey you make. The ATO will allow a representative period of 12 consecutive weeks that can be averaged throughout the year. You can then use this claim for five years. But remember to keep your logbook and take odometer readings at the start and end of each year that you use it in order to keep the logbook valid. The logbook method is used per car.
Pro tax tip: Claiming car expenses depends on your business structure. Sole traders and partnerships can claim using both methods, while companies and trusts can only claim using the ‘actual cost method.’
The vehicle can be owned, leased, or hired under a hire purchase agreement by an individual to claim your car expenses.
Pro tax tip: For other vehicles that are not classed as a ‘car,’ the actual costs method must be used.
Tax tip #6: Know thy class of car
The ATO doesn’t rate all vehicles as equal and classifies cars and vehicles into categories from which certain tax deductions are applicable. A car is designed to carry a load of less than one tonne and fewer than nine passengers, although many work four-wheel drives and utes are classed as ‘cars’ for taxation purposes.
If you’re wondering what is classified as ‘other vehicles,’ this includes:
- Motorcycles
- Minivans that carry nine or more passengers
- Utes or panel vans designed to carry loads of one tonne or more
Related: How to use your tax rebate to start a small venture
Tax tip #7: Depreciation can be your friend
Your car’s running costs are claimed using the cents per kilometre method or the logbook method, but your capital costs can be claimed using depreciation, such as the purchase price of the vehicle.
Using depreciation, the price declines in value over a period of time.
The ATO has a guide that you need to follow and will determine how many years your car will be depreciated for.
If your business vehicle is a car, there’s a limit you can work out the level of depreciation. For the 2021-22 income year, the limit is $60,733 ($59,136 in 2020-21) or the cost of the vehicle if it’s less than this amount.
Pro tax tip: A number of schemes were introduced to help businesses with the financial effects of COVID-19. Your business may be eligible for an immediate deduction or an accelerated rate of depreciation under one of the tax incentive schemes.
Claim those work-related car expenses
There are many factors when claiming tax deductions for your car —and also many ways you can use your car to lower your tax bill. Minimising your tax obligations is allowable and legal, but it does pay to understand how and what you can claim.
Although this article is by no means exhaustive, we hope that it’s given you a few pointers and ways to save your hard-earned dollars. Happy work-related driving!
This content is for educational purposes and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
