Claiming car expenses can be minefield for some business owners, as deduction methods vary depending on your work situation. This simple two-part method will help you decode whether you can claim vehicle expenses, and which methods will help you achieve the best deduction.
Aside from our home mortgages or rent, the cost of running our cars is the biggest personal expense we often have. This can be especially the case for families that need to run multiple cars. Therefore, many accountants regularly receive enquiries from clients based around whether or not they can claim car expenses and the best methods to achieve the optimal outcome.
Lets break this down into two parts. Firstly can you claim car expenses for work related travel? If you can answer yes to any of the following questions then you should be entitled to claim car expenses in some way.
a. Do you have to carry bulky goods or equipment used for work?
b. Are you a home-based worker, with no other base of employment?
c. Do you regularly work at different sites during the day?
To better illustrate these scenarios, lets run through some examples that will further clarify these requirements.
A tradesman (or any other worker for that matter) who is required to transport bulky tools and/or materials to and between job sites would be entitled to claim car expenses, simply because there is no alternative for them to transport materials and tools. If you operate a home based business and work from home and then travel by car to other sites to perform work you could claim the costs of running your car. A bookkeeper that works at different clients sites during the day would be entitled to claim a deduction, as they would be treated as an itinerant worker who has a network of workplaces. Other common examples that may apply are nurses who travel to make home help visits, teachers who transport students (or just themselves) to different venues such as swimming carnivals, school excursions and camping trips and business owners who travel between their business locations during the day.
Now that you’ve decided if you can claim car expenses or not, we’ll take a look at the methods you can use to claim car expenses to ensure you get the best possible deduction. There are various methods you can use to claim your car expenses, depending on your work situation:
a. Cents per kilometre – based on a set number of kilometres in a tax year.
No documentary evidence needed other than to show how you worked out the number of kilometres travelled. This method is best if you only do a few trips during the year and you can keep a diary of what those trips were for. The ATO issues three different per kilometre rates based on engine capacity.
b. 12 percent of original value – your claim equals 12 percent of the cost of your car.
Best used where you travel more than 5,000 km per year but don’t want the strain of keeping documented records. You will still need to keep a record of how you decided you had travelled more than 5,000 work related kilometres. Note that this claim is limited to the luxury car limit, which is $57,466.00 for 2012/2013
c. One third of actual expenses – used if you travel more than 5,000km per year.
You only claim one third of the costs of running a car. The cost of buying the car, including finance costs are specifically excluded in this scenario. Written records will be required to show your total expenses and car details.
d. Log book method – the most complex method that requires a log book of all work related trips to be completed over a three-month period and retained for five years.
A tax office approved log book must be maintained for three months to show all work related trips, starting odometer and ending odometer readings. The percentage of work based travel is then applied to all of your car expenses including depreciation on the value of the car, finance charges and all running costs. Receipts must be kept for all expenses as evidence in the event of an ATO audit.
Knowing just how much can be spent on owning and maintaining a car, the benefits of being able to legitimately claim at least some of those expenses can result in substantial income tax benefits. It is a complex area and it is always best to seek personalised advice on just how these income tax laws can be tailored to your individual circumstances, it’s just not worth getting it wrong.