You can claim a tax deduction for expenses for motor vehicles – cars and certain other vehicles – used in running your business.

A “car expense” is a loss or outgoing to do with a car, or with operating a car, including the decline in value of the car. A “car” is a motor vehicle designed to carry a load of less than 1 tonne and fewer than 9 passengers but does not include a motorcycle or similar vehicle.

Car expenses calculated using the cents per kilometre method do not require full substantiation. Taxpayers who use the logbook method must follow the substantiation rules.

If you operate your business as a company or trust, you can also claim for motor vehicles provided to an employee or their associate as part of their employment.

Key points to keep in mind include:

– the way a claim is calculated depends on your business structure

– if business changes structure, your entitlements and obligations may also change

– you must apportion expenses between business and private use

– records need to be kept for five years.

Expenses you can claim:

– fuel and oil

– repairs and servicing

– interest on a motor vehicle loan

– lease payments

– insurance

– registration

– depreciation (decline in value) of the vehicle.

If you use the cents per kilometre method, depreciation of the vehicle is already considered.

Types of vehicles

Cars (for income tax purposes) are defined as motor vehicles (including four-wheel drives) designed to carry both:

• a load less than one tonne
• fewer than nine passengers.

Other vehicles include:

• motorcycles
• vehicles designed to carry either:
  • one tonne or more (such as a utility truck or panel van)
  • nine passengers or more (such as a minivan).
  • Utes or panel vans designed to carry loads of one tonne or more.

Note that expenses incurred in running a Ute are not automatically tax deductible; you need to use the Ute in your business and claim the business portion only.

The motor vehicle must be owned, leased or under a hire-purchase agreement.

Records you need to keep
The records you need to keep depends on the method you use to calculate your motor vehicle expenses. Regardless of the method you use, you will need to keep:

– loan or lease documents

– details on how you calculated your claim

– tax invoices

– registration papers.

Please ask us if you require any guidance on any of the above matters.

Business structure

Your business structure can affect your entitlements and obligations when claiming deductions for motor vehicle expenses.

Sole traders and partnerships

If you operate your business as a sole trader or partnership (where at least one partner is an individual), the way to calculate your deduction depends on the type of vehicle and how it is used. The vehicle can be owned, leased, or hired under a hire purchase agreement.

You can only claim motor vehicle expenses that are part of the everyday running of your business (such as travelling to and from different business premises).

If the vehicle is used for both private and business purposes, it is expected that you will exclude any private use (such as driving your children to school).

Logbook method: You can claim the business-use percentage of each car expense, based on logbook records. You must record:

– when the logbook period begins and ends

– the car’s odometer reading at the start and end of the logbook period

– details of each journey including

– start date and finishing date

– odometer readings at the start and end

– kilometres travelled

– reason for the journey.

You must keep the logbook for a period (at least 12 continuous weeks) that is representative of your travel throughout the year. You can then use this for five years.

Other vehicles
For all other vehicles, you can’t use the cents per kilometre or logbook method. Your claims must be for actual costs for expenses, based on receipts. You can use a diary or journal to separate private use from business use. Ask this office for more guidance.

Companies and trusts

If you operate your business as a company or trust, you can only claim the actual costs for motor vehicle expenses that are part of the everyday running of your business (such as travelling to and from different business premises, visiting clients or picking up goods for sale). Actual costs are based on receipts for expenses incurred.

Note that you cannot use a simplified method, such as cents per kilometre, to calculate your claim.

Make sure private use is separated from business use – by keeping a logbook or diary, recording the purpose of each trip and what portion was for business.

If your business is a private company that provides a vehicle to a shareholder or their associate to use in their capacity other than as an employee, this may be treated as a dividend or loan that could affect the deductibility of your motor vehicle expenses. Ask us if this seems to fit your circumstances.

Motor vehicle ownership

There are further considerations depending on the ownership of the vehicle.

Vehicle owned or leased by your business: Your business can claim a deduction for the running expenses of a vehicle that is owned or leased by your business.

If the vehicle is available for private use by an employee or their associate (such as a spouse), fringe benefits tax (FBT) may apply.

Vehicle owned by your employee: If your employee uses their own vehicle for business-related purposes and you pay them a motor vehicle allowance or reimburse them their costs, your business can claim a deduction for the allowance or expenses reimbursed, such as the cost of fuel.

Depreciation of a motor vehicle

If you work out your deduction for expenses using the logbook method or actual costs, then you can generally claim a deduction for capital costs, such as the purchase price of a motor vehicle, over a period of time. This is known as depreciation or a decline in value.

You can apply the:

– simplified depreciation rules – by adding the motor vehicle’s cost to the small business pool or using the instant asset write-off (if eligible), or

– general depreciation rules – by claiming a deduction over the effective life of the asset.

Separate private from business use

If a motor vehicle is used for both business and private use, you must be able to correctly identify and justify the percentage that you are claiming as business use. The percentage that is for private use isn’t claimable. This is an area where we often see errors made.