VROOM VROOM TOOT TOOT
The Vengabus is coming and I hope they’ve done their log book!
Our friends at the ATO appreciate that sometimes we have to use our cars for work so they allow us to make a deduction for that, but there are some really specific rules on who can deduct, for which vehicles, and how to calculate the amount of the deductions.
Car Expenses include:
The thing is though, most of the time you don’t just get a deduction for every dollar you spend on these expenses. We need to understand when we are allowed to make a deduction, for which vehicles, how to calculate the amount to put in our tax return each year - and what records we need to keep.
Buckle up my friends, we’re going for a ride!
Hands up - who knows what a car is?
Well, for tax purposes a car is classed as a motor vehicle that can carry fewer than nine passengers and a load that’s less than one tonne. It must be owned, leased or under a hire-purchase agreement to make deductions in relation to its use.
Other vehicles could include motorcycles or vehicles that can carry more than nine passengers (like a minivan), or a load greater than one tonne (a ute or panel van). Slightly different rules apply to these vehicles. The ATO makes it tricky with the very specific terms they use i.e. for these vehicles you cannot claim ‘car expenses’ but you might be able to claim ‘travel expenses’.
Let’s say you have a car and you use it to scoot around town for work and/or business activities. Next you’ll need to figure out which calculation method is best to determine your deduction.
There are three different methods to claim your car expenses as a tax deduction:
The cost of the actual car purchase and the depreciation of the car is a different topic.
The Logbook Method: Business % x total actual expenses.
Basically, this method is saying: if you use your car for work 30% of the time, you can claim 30% of your total car related expenses. If you use it 90% for work, then get a deduction for 90% of the expenses. So, you need to be able to calculate your total expenses and be able to verify the % you use the car for work.
How do we do this? A log book and heaps of receipts.
For 12 consecutive weeks you need to keep a log book, recording every trip you make in the car (personal and business). The log book should show:
This will give you a representation of the percentage of business vs personal kilometres travelled. We use this to calculate your ‘business use %’. Logbooks are valid for five years, however, if you believe that your business to personal percentage has materially changed, you can start another one.
Every year you also need to keep all receipts to track expenses like:
I recommend having a separate spreadsheet to summarise these expenses as you go (fun little job at the end of each month?), and taking a photo of receipts to save safely in the Google Drive folder, ready for tax time.
Hot Tip: to account for the depreciation of your vehicle, check out our other blog! You will calculate the total depreciation, then apply the ‘business use %’ per your log book.
*You can’t really do this retrospectively at all because the log book is only legit if it has the odometer reading in it.
The Cents Per Kilometre Method: All actual business KMs, all year (no actual expenses).
This is the most common method for individuals who use their car for their jobs (like employment), and for those who don’t do crazy amounts of driving for work.
With this method you only need to record kilometres driven for work/business trips. This record needs to be for the whole year and not just 12 weeks. The upside is you don’t need to record personal trips or keep records of actual expenses - so no receipts!
The catch? A maximum of only 5,000 business KMs can be claimed.
Using the rate of 68 cents per KM (which was the rate for 2019), this would be equal to a maximum deduction of $3,400.
Hot tip: you cannot just put 5,000 KMs down in your tax return.
While you don’t need receipts for expenses, you are still required to substantiate (i.e. have support/evidence of) how you got to the number of KMs you enter. You could do this with your calendar, if it lists your work related trips.
My recommendation is to have a spreadsheet, like a ‘light’ log book, showing:
(no odometer, and no personal trips!)
We have a template for all of our clients. Lucky you.
Keep this saved in your Google Drive folder ready for tax time!
Cents per KM Method
Easy to calculate
Deduction is capped at 5,000km or $3,400
Can result in larger deductions
Time consuming to keep records (ie. logbook) up to date
Limited record keeping and not required to keep receipts
Can claim depreciation and running expenses of the vehicle.
Must keep all receipts relating to running expenses
Generally speaking, individuals with a small amount of business kilometres will use the Cents per Kilometre method, as the time it takes to save all the business related records and receipts outweighs the benefit. Those individuals who have large amounts of business related travel tend to lean toward the Logbook method as their deduction is not capped at $3,400.
The Actual Costs Method
This one is not really a choice… it must be used when:
How does it work? It is very similar to the logbook method (see above), in which you must keep records of all running expenses and, if applicable, must apportion between business and personal use. You/the entity can only claim for the business use portion of the actual expenses.
If you run a Company or Trust and have provided a vehicle to your employee, then your entity could get a deduction. The employee will provide the business with all the costs of the vehicle, proportioned for personal use, and the Company/Trust can claim the business portion as a tax deduction. So, basically a logbook, right? Providing a vehicle to your employees, who take it home and have it available for personal use can trigger something called Fringe Benefits Tax. More on that later…
I’m an employee, and I have to drive between project sites everyday.
An employee can claim car expenses as a tax deduction using either the Cents per Kilometre method or the Logbook method. Regardless of which method you decide to use, you can only claim the distance between your place of work (i.e. your office building) and the destination of your work related travel. You cannot claim the distance from your home, it must be from your place of work.
I’m an employee, and I drive to and from my office everyday.
You cannot claim any car expenses as a deduction. Trips to and from your home are not deductible.
I’m a sole trader who works from home and doesn’t drive for work.
To claim a tax deduction, you must have first incurred the expense. As you don’t drive for work related purposes, only personal, you cannot claim a car related tax deduction.
I’m a sole trader, and I drive a lot!
Some jobs require a lot of travel, and the method you can use depends on what type of vehicle you have. Let’s use a photographer as an example. If the photographer drove a car to each job, then you could use either the Logbook or the Cents per Kilometre method. However, if you were to drive a motorcycle, then you would be required to use the Actual Costs method. It is very similar to the Logbook method, however it is claimed under a different code on your tax return - your accountant will handle that for you!
I’m a Company Director, who works in my Company.
Just like any other employee, you must use your car for work related purposes to be able to claim a deduction. You can choose either the Logbook or the Cents per Kilometre method to calculate your deduction in your own tax return (not the Company’s).
I’m run a Company and the Company provides employees with vehicles.
If you run a Company or Trust and provide a vehicle to your employee, then you can claim a deduction for the expenses of those vehicles, but there are other tax implications to keep in mind like apportionment and Fringe Benefits Tax. Those are topics for another day!
I’m a home based business.
Unlike the other examples above, if you are a home based business you can claim work related trips from your home, as it is your place of business. You can choose either the Cents per Kilometre method or the Logbook method to claim a deduction.
Buying a car can sometimes be the best way for small businesses to make the most of ATO’s Instant Asset Write-Off deduction. Please don’t take tax advice from car salespeople though - check with your accountant before making any significant purchases like this because while some of these ‘write-off rules’ seem pretty great it might be too good to be true. Not all businesses are eligible for this instant deduction, so check with your accountant and read more from the ATO here.
If you and your accountant agree this is something worth exploring, you can pair this instant deduction with the running costs of the car. However, there are other tax implications to take into account before making that purchase. Some of these include Fringe Benefit Tax, Luxury car depreciable limits and personal vs business use.
What is my dream car? A Porsche 911. Very sexy. Not totally deductible though.
(and co-author Caitie Copley)
Time Hacks for Small Business Owners
Common tax deductions for creative clients
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