Many business owners understand the importance of claiming motor vehicle expenses as a tax deduction when a vehicle is used for generating income. However, there’s often confusion, with some small business owners not fully aware of the best claiming method for their circumstances. To address this, it’s crucial to recognise that the Australian Taxation Office (ATO) provides different methods for claiming these expenses, tailored to suit various business structures and vehicle types. These methods include:
The simplified method for Sole Traders and Partnerships
- Cents per kilometre
The detailed method for Companies, Trusts, and vehicles other than cars
- Actual cost method
Cents Per Kilometre Method
The simplest method is the cents per kilometre method, However there is a capped claim of 5,000 kms per car per year under this method, and if you do more than 5,000 kms, you may find that the log book method is more tax-effective. You need to keep records of your work-related trips and the total kilometres travelled.
For the year 2023-24 financial year, the rate is 85 cents per kilometre, covering all vehicle operational costs.
The rate are reviewed regularly so always check ATO for the latest rate.
- Simplicity: Ideal for small businesses with minimal business-related driving.
- Documentation: Keep a diary of business trips to justify the kilometres claimed.
- Limitation: Capped at 5,000 kms per car, per year, which might not suit high-mileage users.
Important Note: This method takes all of your car running expenses, including depreciations, into account, which also means you can’t make a separate claim for depreciation of the car’s value.
The Log Book Method
The logbook method requires you to keep a record of all your travel, work and private, in a logbook for a continuous period of at least 12 weeks. This method suits those who travel more than 5,000 km for business annually.
You then calculate your business use percentage and apply this to your total car expenses for the year. You also need to record and keep documents to support your total vehicle expenses for the year.
- Accuracy: Provides a more accurate deduction for those with high business use.
- Record-keeping: Requires diligent documentation, including odometer readings and receipts for all vehicle expenses.
- Logbook Validity: The logbook is valid for five years, but a new one may be needed if your business usage significantly changes.
Important Note: For sole trader with simple tax affiars, you can use the MyDeductions tool in the ATO apps to create log book and records business-related car trips.
Actual cost method
The actual cost method is a comprehensive approach for calculating motor vehicle expenses, applicable to a wide range of businesses, including companies, trusts, and those using vehicles other than cars for business purposes. This method involves meticulously tracking and claiming the actual expenses incurred in the operation of a vehicle for business activities. It encompasses all costs associated with the vehicle’s business use
- Comprehensive Coverage: Allows for all vehicle-related expenses to be claimed based on the percentage of business use.
- Extensive Record-keeping: Requires meticulous documentation, including receipts for all costs and a logbook or diary to track business use.
- Versatility: Suitable for a variety of vehicles and business structures, including companies and trusts.
- FBT Implications: Particularly for companies and trusts, the potential for Fringe Benefits Tax (FBT) needs to be considered if the vehicle is available for private use by employees or associates.
- Depreciation: Don’t forget to account for depreciation. This allows for the capital cost, such as the purchase price, to be deducted across the vehicle’s useful life. Be aware of tax depreciation incentives like temporary full expensing, which might offer immediate deductions or accelerated depreciation rates
- Depreciation Limit for Car: If your business vehicle is considered a car, remember there’s a limit on the depreciation amount you can claim. Refer ATO for the updated limit.
Each method has its unique requirements and considerations, making it crucial for business owners to choose the one that best fits their situation. The choice depends on factors like the amount of business driving, the type of vehicle used, and the business structure. Keeping accurate records is a fundamental aspect of all methods to ensure compliance with the Australian Taxation Office (ATO) requirements and to maximise the claimable deductions.
If you need help determining the best method for your business, MKG Partners can assist you. Contact us to find out how we can help you maximise your motor vehicle expense claims.