IN THIS ARTICLE
Travel between home and work
Substantiating motor vehicle expenses
Car limit for depreciation and GST
Acquiring a motor vehicle
DEDUCTIBLE TRAVEL FOR SELF-EMPLOYED AND EMPLOYEES
Motor vehicle expenses incurred in the course of deriving assessable income or in carrying on business are allowable deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 97), provided substantiation rules are met (discussed later).
- petrol, oil, repairs, servicing, new tyres
- lease charges
- interest on a car loan
- car washes and polishes
- bridge or road tolls
- car registration
- third party insurance, comprehensive insurance
- annual fees for membership in motorists’ associations
They do not include parking or speeding fines.
Generally, a deduction is allowable for parking fees incurred while travelling in circumstances where the travel expenses are deductible. However, deductions are not allowable for parking fees incurred by an employee where the car is used to commute from home to work and is parked at or near the employee’s main workplace for more than four hours during the day between the hours of 7 am and 7 pm – s 51AGA ITAA 1936.
TRAVEL BETWEEN HOME AND WORK
Generally, for the purposes of claiming deductions for work related car or travel expenses, taxpayers cannot claim the cost of normal trips between home and work as that travel is private. This is the case even where an allowance is received to cover the cost of travel.
However, the Australian Taxation Office (ATO) has stated it will allow deductions for home to work travel in the following scenarios:
- the taxpayer’s job is itinerant
- the taxpayer is required to carry bulky equipment to work and no secure storage area is provided at the workplace
- the home is used as a base of operations and travel is to another place of related employment or business
- travel while on stand-by duty where it is concluded, on an objective analysis of the nature of the employment duties, that the employee commenced duties on receiving the call (e.g. a computer consultant on call 24 hours a day)
- certain business trips on the way to work from home or from work to home where:
- the employee has a regular place of employment to which he or she travels habitually; and
- in the performance of his or her duties as an employee, travel is undertaken to an alternative destination that is not itself a regular place of employment; and
- the journey is undertaken to a location at which the employee performs substantial employment duties.
Substantiating motor vehicle expenses
Employees and self-employed persons need to substantiate motor vehicle expenses before a deduction can be claimed for them (i.e. provide written evidence of the expenditure).
Expenses incurred in respect of a motor vehicle used for both private and non-private purposes must be apportioned. Only that part appropriate to employment or business use is deductible.
The substantiation provisions provide two specific methods for substantiating claims for car expenses incurred in relation to travel within Australia – the log book method or the cents per kilometre method.
THE LOGBOOK METHOD
This method can be used regardless of the business kilometres travelled. To use this method, a log book must be kept for at least 12 continuous weeks to determine the business-use percentage of the car expenses. Having established the percentage, the business share of each car expense can then be claimed including depreciation on the vehicle. All the relevant receipts must be kept.
A logbook is valid for five years. It must contain the following information:
- when the logbook period begins and ends
- the car’s odometer readings at the start and end of the logbook period
- the total number of kilometres the car travelled during the logbook period based on the journeys recorded for the period
- the business-use percentage for the logbook period
- the number of kilometres travelled for each journey recorded in the logbook (if two or more journeys in a row are made on the same day, they can be recorded as a single journey).
A journey is recorded by making in the log book an entry specifying the
- the day the journey began and the day it ended;
- the car’s odometer readings at the start and end of the journey;
- how many kilometres the car travelled on the journey; and
- why the journey was made.
The records must also show the make, model, engine capacity and registration number of the car.
The odometer readings at the start and end of each income year the logbook method is used must also be kept.
For GST purposes, the Commissioner of Taxation accepts that if a log book is maintained and all the business use of the vehicle is for a creditable purpose, the percentage of business use obtained for income tax purposes can also be used as the extent of creditable purpose. If the business use is not entirely for a creditable purpose, for instance, the business use includes travel for employment or travel in respect of input taxed supplies, then the extent of creditable purpose must be reduced accordingly.
CENTS PER KILOMETRE METHOD
The cents per kilometre method is a simple way to work out how much you can deduct for car related work or business expenses. Only individuals, including sole traders, or partnerships (where at least one partner is an individual) can use the cents per kilometre method. So if you operate your business through a company or trust, the business will have to use the actual costs method to claim car and vehicle running expenses.
The cents per kilometre rate takes into account all your car running expenses (including registration, fuel, servicing and insurance) and depreciation.
How does the cents per kilometre method work?
To work out how much you can claim as a deduction, you simply multiply the total work/business kilometres you travelled by the appropriate rate.
The cents per kilometre rate for the 2022-23 tax year is 78 c/ km. The cents per kilometre rate for the 2023-24 tax year is 85 c/km.
Importantly, you cannot claim more than 5,000 work/business kilometres per car, per year. So if you use your car for more than 5,000 kilometres a year for work or business purposes, you will need to use the logbook method to calculate your deductible car expenses.
You don’t need written evidence to show exactly how many kilometres you travelled (although the ATO may ask you to show how you worked out your work/business kilometres, for example diary records).
What is considered a “car”?
The cents per kilometre (and logbook) method only applies to cars. For tax purposes, a car is a motor vehicle (including a 4-wheel drive) designed to carry a load of less than one tonne and fewer than 9 passengers.
This means utes are generally not cars for tax purposes and thus you cannot use the cents per kilometre (or logbook) method to calculate your deductible ute expenses. You will have to use the actual costs method instead.
Apportioning private use
If you use a motor vehicle for both work/business and private use, you must be able to correctly identify and justify the percentage that you are claiming as work/business use. You cannot claim a deduction for the percentage that is for private use. This is an area where the ATO often sees errors made.
You can use a logbook or diary to record private versus work/business travel.
Note that travelling between your home and your place of work/business is considered to be private use, unless your home is considered to be your place of work, or you operate a home-based business and your trip was for work/business purposes.
What about GST?
For GST purposes, a method is needed to work out the extent of creditable purpose. This can be done using the following formula:
reasonable estimate of business kilometres per tax period divided by reasonable estimate of total kilometres per tax period
where the estimate of business kilometres is the same as that used for income tax purposes, excluding any travel in respect of employment or making input taxed supplies. Business and total kilometres can be estimated from odometer readings, service records or any other reasonable basis.
GST Bulletin GSTB 2006/1 states that if a reasonable estimate of the kilometres travelled for a creditable purpose for a year does not exceed 5000, for GST purposes, the following set rates can be used. The rate used depends on the number of kilometres:
|Estimated kilometres travelled for a creditable purpose for a year||Assumed extent of creditable purpose|
PANEL VANS AND UTES
In relation to motor vehicles that are utilities, panel vans or other road vehicles designed to carry a load of less than one tonne (other than vehicles designed principally to carry passengers), section 28-170 ITAA 97 provides exceptions for the way that deductions can be claimed, therefore allowing for claiming some of these costs without keeping a log book, but only in certain circumstances.
To qualify, the vehicle must be used only in one or more of the following ways:
- in the course of producing assessable income;
- to go between the residence and a place where the car is used in the course of producing the assessable income;
- for the purpose of travel that is incidental to using the car in the course of producing the assessable income;
- for the taxpayer’s own or someone else’s private use that is minor, infrequent and irregular. If the car is used on weekends for private use, this does not constitute use that is minor, infrequent and irregular.
Car limit for depreciation and GST
There is a car limit for calculating the decline in value of a car. For the 2024 financial year It is $68,108. For the 2023 financial year it was $64,741. The limit applies whether the vehicle is new or second hand.
The car limit applies after the cost of the car has been reduced by any GST input tax credits. The maximum input tax credit is 1/11 x $68,108 = $6,191 on creditable acquisitions of cars more than the car limit.
Mary is registered for GST and purchased a car for $77 000 (with GST). The car is used 100% for a creditable purpose. Her maximum input tax credits are $6,191. The maximum that can be claimed for depreciation purposes is $68,108.
Acquiring a motor vehicle
There are various ways that the acquisition of a motor vehicle can be financed:
- Novated leases
- Hire purchase agreements
- Chattel mortgages
The tax implications of the above are considered in the next sections.
In this arrangement, the employee enters a lease of a vehicle with a finance company. Then a deed of novation is entered between three parties – the finance company (the lessor), the employee (the lessee), and the employer, whereby they agree to change or transfer all or some of the rights and obligations in the motor vehicle lease entered into between the lessor and lessee to the employer.
The deed of novation usually contains a clause that transfers the lease obligations back to the lessee on termination of the lease or when the employee ceases employment.
Generally, a fully novated lease is entered which provides for the employer to take over all the rights and responsibilities contained in the original lease between the lessor and the employee. There are no income tax or GST consequences for the employee during the period when the employer makes the lease payments.
It should be ensured that a partial novation is not entered, as this may result in adverse tax consequences for the employee.
Hire purchase agreements
A hire purchase agreement is a contract for the hire of goods. Instalment payments are made. The hire purchaser has the use of the goods while paying for them but the title to the goods remains with the financier. The title does not transfer to the hire purchaser until the final instalment has been paid or an option to purchase is exercised.
The total amount charged to a recipient under a hire purchase agreement is typically made up of a principal component (i.e. the amount financed) and a credit component (i.e. the terms and charges). The principal component represents the price of the goods financed and the credit component represents the interest and associated fees and charges payable by the recipient.
For income tax purposes, hire purchase agreements are treated as a sale of goods and a separate supply of finance.
INCOME TAX TREATMENT
The hire purchaser is treated as the notional owner of the vehicle. Where the vehicle is used for income producing purposes, he or she can claim depreciation and can also claim a deduction for the interest component paid each year but not the principal payments.
Note that the amount of depreciation that can be claimed is limited to $57,581.
For hire purchase agreements entered on or after 1 July 2012, all components of the supply made are subject to GST regardless of whether the credit component is separately disclosed. Any associated fees and charges, such as late payment fees incurred under the terms of the hire purchase arrangement, are also subject to GST.
The interest charge is not subject to GST for agreements entered prior to 1 July 2012 if it is provided separately and disclosed to the recipient of the goods.
If the hire purchaser (i.e. the recipient) is registered for GST and the goods are for use in the business, an input tax credit may be claimable for any GST paid on the purchase of the goods.
Where the recipient accounts for GST on a non-cash basis and the item purchased is a creditable acquisition, the recipient is entitled to the entire input tax credits in the tax period in which the invoice is received or in which any payment is made, whichever is earlier.
For agreements entered into before 1 July 2012, input tax credits are only available for the principal component of the agreement, not the credit component.
If the recipient accounts for GST on a cash basis and the item purchased is a creditable acquisition, the rule used to be that the recipient was entitled to an input tax credit in a tax period, only to the extent of the GST paid in that tax period. However, for hire purchase agreements entered on or after 1 July 2012, all the input tax credits can be claimed up front instead of waiting until each instalment is paid.
This means the distortion that previously existed between hire purchase and other forms of financing for cash-based taxpayers is removed.
Chattel mortgages involve a taxpayer borrowing to acquire a vehicle. The taxpayer takes title to the vehicle from the time of purchase. The purchase price (or part thereof) is paid for out of the borrowed money.
The purchaser has title to the vehicle and holds a tax invoice for the purchase. However, the effect is that the purchase of the vehicle is fully financed by a finance company.
The borrower (purchaser) assumes ownership of the goods but transfers to the lender an equitable interest in the goods, enabling the lender to seize and sell the goods in the event of default. By providing a mortgage over the goods as security, the borrower is able to obtain funds from the lender.
INCOME TAX TREATMENT
For income tax purposes, when acquiring a motor vehicle, the taxpayer has acquired a depreciable asset on which depreciation can be claimed up to the luxury car limit (discussed below) where it is used for income producing purposes.
Interest on the mortgage will also be deductible in these circumstances.
The taxpayer is entitled to full input tax credits in the tax period in which it purchases a vehicle financed under a chattel mortgage for creditable purposes. This is whether the taxpayer returns on a cash or accruals basis.
This is because the purchaser is using borrowed funds to provide full payment for the asset at the time of purchase. Therefore, as all the consideration for the asset is provided at the time of the purchase, the purchaser is entitled to attribute the input tax credit to the tax period in which it purchases the asset.
LEASE OF MOTOR VEHICLES
Under a lease agreement, a person, the lessee, has the use of property for a specified period, in return for a series of payments. The person who grants the lease, the lessor, remains the owner of the property.
INCOME TAX TREATMENT
The lessor pays income tax on the lease payments each year less the GST component. The lessor can claim depreciation on the asset.
The lessee, where using the asset for income producing purposes, can claim deductions for the lease payments each year less any input tax credit entitlements.
A deduction may be claimed for expenditure incurred in preparing, registering or stamping a lease of property or an assignment or surrender of a lease of property to the extent it is used for the purpose of producing assessable income.
On disposal of the car to the lessee, the lessor will have a balancing adjustment for depreciation purposes.
Special rules apply for leases of luxury cars.
If a business is registered for GST and it provides taxable goods through a leasing arrangement, it is liable to pay GST on each lease payment amount on a progressive basis.
Lessees who are registered for GST may be able to claim input tax credits for any GST paid on the lease of the vehicle on a progressive basis.
If ownership of the vehicle changes hands at the end of the lease, this is a separate transaction to the lease agreements. This transaction may be subject to GST. If the buyer is registered for GST it may be entitled to claim input tax credits for any GST included in the sale price.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.