Maximising Car Tax Deductions

19 Jun 2011 |

Motor vehicles are often a necessity for business. Where their use will be for business purposes the cost is tax deductible, for vehicles with little business use the cost must be funded by after tax profit. How much can be claimed depends on the type of vehicle, the number of business kilometres driven in a year and the method used to claim the expenses.

Vehicles designed to carry more than 8 passengers, or a load of 1 tonne or more, can be claimed in full unless they are used for purely private purposes. Panel vans, taxis, and utes of less than 1 tonne can also be claimed in full where the private use is limited to travel between a person’s place of residence and their place of business or where private travel is minor, infrequent and irregular.

What is business travel in most cases is self evident. Business travel does not include driving from home to your place of business and return and any travel that is for private purposes. It does include driving from home to a business appointment then to work, driving from a place of business to an appointment then home.

When the vehicle is used to carry bulky tools or goods from home to work this travel can be classed as business travel. Examples of this are a retailer that stores goods at home and then transports them to their shop, a salesman that must carry a wide range of samples with them at all times and a carpenter that carries a compressor and other equipment in the back of a ute or a station wagon.

The rules applying to claiming for a vehicle differ depending on what method is used. The 5 different ways to calculate and claim motor vehicle expenses are:

  • the kilometre method,
  • the 12% of original value method,
  • the one third of actual cost method, and
  • the log book method.

To work out what is the best method to use a rough estimate should be made of what the percentage business travel is of total travel. With this rough estimate of business and total kilometres you will know approximately what percentage your business travel is. Where the estimated business kilometres driven in a year is less than 5000, you must use the kilometre method unless you are prepared to keep a logbook for 12 weeks.

The Kilometre Method

Under the kilometre method the tax deduction is arrived at by multiplying the business kilometres, up to a maximum of 5000 a year, by a cent per kilometre rate. No documentation needs to be kept to prove the number of kilometres claimed. You must however be able to show how you estimated the distance traveled in a reasonable way. This could be by looking at the number of business trips done in a month, the kilometres traveled for each trip, then multiplying the total for the month by 12.

The rate varies depending on the engine size of the vehicle. The rates for the 2010/2011 year are:

Engine size of car

Cents per Kilometre rate

Up to 1600cc

63 cents

1600 cc to 2600cc

74 cents

Over 2600cc

75 cents

These rates apply to conventional cars, for rotary cars and motor bikes different engine sizes or rates apply.

Where two or more cars are owned in a year and used for business purposes a tax deduction can be claimed for each car using this method. The thing to remember is that you must be able to show that you have reasonably estimated how much business travel is done in each car.

The 12% of Original Cost Method

With this method the tax deduction is equal to the cost of the vehicle, up to the depreciation cost limit of $57,466, multiplied by 12 per cent. The cost figure used in this calculation is the after GST cost of the car. For example a car that cost $33,000 including GST would have a cost base for this method of $30,000. The annual tax deduction for this vehicle would be $3,600.

One Third of Actual Running Costs Method

Under this method the running costs associated with the car are totaled and the claim is calculated by dividing this total by three. Running costs include fuel, repairs, registration, insurance, motor association subscriptions, road and bridge tolls, lease payments, interest on loans and hire purchase contracts and depreciation.

Where a person has more than 1 car they can choose whichever method gives them the best tax deduction. An example of this would be an electrician who owns a van, set up with all of his equipment and tools, a UTE that cost $15,000 and a car that cost $50,000.

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