When you use your car to produce income, you may be entitled to claim a deduction for the expenses associated with operating the car. Where the use of the car is partly for earning income and partly for private use, the portion that is income-earning is called the 'taxable purpose proportion'. In most cases, you can only claim a deduction for the taxable purpose proportion of car expenses.
When claiming car expenses in your income tax return, there are specific methods for calculating the amount of the deduction. You may wish to consider which method will give you the most favourable outcome (i.e. the greatest deduction). The ATO provides two methods of tracking car related expenses, these are explained below:
Cents per kilometer method:
This option is available to drivers travelling less than 5,000kms per year for their purpose of rideshare work. In this case, you can claim 66 cents per kilometer traveled for business purposes up to 5,000kms per year.
You don't have to be able to produce written evidence to use this method, however you do need to be able to show how you reached the figure that you are claiming. You might do this, for example, by showing records of the days that you used your car for work.
The cents per kilometre method will allow you to claim a deduction that incorporates costs of running the car such as fuel and maintenance as well as insurance and depreciation.
Where using the cents per kilometre method you cannot also claim under the logbook method.
The cents per kilometre method may be the easiest method to apply, however it will not always give you the most favourable outcome. You should consider if this is the best option for your circumstances.
If you are travelling more than 5,000kms for business during one financial year and planning on claiming car expenses, the ATO requires that you keep a logbook of distance traveled and the purpose for your travel. This must be kept for a minimum of 12 continuous weeks during the year and can then be used to calculate the annual car expenses and business use percentage. Each 12 week log book period can then be used for up to 5 years.
Other expenses which might be possible to claim include car running costs and decline in value of the car (but not capital costs). And don’t forget, you are required to maintain written evidence of all expenses claimed. This may be in the form of receipts.
Your log book must show:
- The period start and end dates and odometer readings at these times.
- Total kilometers traveled during the 12 week period.
- Number of kilometers which relate to work travel during the 12 week period.
- Business use percentage for the period (this will be calculated using the figures from points 2 and 3 above). The log book method requires a bit of work up front to keep track of your travel over the 12 week period but often provides a great deduction outcome if you are travelling a lot and can be used for a substantial period of time after you have made the upfront time investment.
What if I didn't complete a log book?
If you did not maintain a log book during the year you cannot use the log book method to claim car expenses in your annual income tax return and instead would need to use the cents per km method limiting your claim amount to 5,000km at 66 cents per km.
GST and the logbook method:
When calculating your business use percentage for expenses being claimed in your BAS the log book method can be a great way to determine this percentage. If you did not keep a logbook the ATO allows you to work out a reasonable estimate of the business use percentage of expenses based on your records. Alternatively you can use the ATO set rates based on the number of total business kms travelled during the year as outlined here.