Deductions
Car expenses
Car expenses are the costs of running a car for business or work, which may be deductible for the work or business portion using either the cents per kilometre or logbook method.
Car expenses cover the costs of running a car that you use to earn income, such as fuel, registration, insurance, servicing, repairs, tyres, interest and the decline in value of the car itself. They are only deductible to the extent the car is used for work or business purposes. Ordinary trips between home and a regular place of work are generally treated as private, with limited exceptions, so travelling to work each day is not usually deductible.
Individuals and some business structures, such as sole traders and partnerships made up of individuals, can generally choose between two methods for claiming a car they own or lease. The cents per kilometre method uses a rate set by the ATO for each business kilometre, up to a cap on kilometres. The logbook method uses a record of travel over a representative period to establish a business use percentage, which is then applied to the actual running costs. Different rules apply to companies, trusts and employer provided cars.
Deciding between the methods is a practical question of how much you drive for business and how much it costs to run the car. A low-cost car used for a modest amount of business travel may do well under the cents per kilometre method, which needs less paperwork. A car with high running costs, or one used heavily for business, often produces a larger deduction under the logbook method.
GST is a separate layer. A business registered for GST may claim credits on car purchases and running costs to the extent of business use, but credits on the purchase of a car are limited by the car limit, which is set by the ATO and changes. Credits are claimed in the BAS and you need a tax invoice for purchases above the threshold of $82.50 GST inclusive. Choosing the cents per kilometre method for income tax does not mean you can ignore GST apportionment rules.
Records matter a great deal with cars. Under the logbook method you must keep the logbook and odometer readings, plus receipts for the actual costs. Under the cents per kilometre method you do not need written evidence of the expenses, but you must be able to show how you calculated the kilometres. All car records should be kept for five years from the date they are relevant.
Common mistakes include claiming private trips, treating commuting as business travel, forgetting that a car used by a sole trader for taxi or ride-sourcing may have different considerations, and claiming a GST credit on the full price of an expensive car. Because the rules turn on your structure and use, this is general information only and you should check your own position with the ATO or a registered tax professional.
Worked example
Sam is a sole trader and has a car with annual running costs of $8,000 including GST. His logbook shows 70% business use. Deductible running costs are 70% x $8,000 = $5,600 including GST. The GST credit is $5,600 / 11 = about $509, and the GST-exclusive deduction is about $5,091. Depreciation is calculated separately and is subject to the car limit if it applies.
Practical tips
- Never treat the daily trip between home and a regular workplace as business travel without checking the rules, because it is generally private.
- Choose the method that suits your actual driving. Compare cents per kilometre with the logbook result before you commit for the year.
- Keep odometer readings and tax invoices together with your logbook, as you may need to show them for up to five years.