Get Your Motor Running – Changes to Motor Vehicle Tax Deductions

If you have ever tried to claim your motor vehicle as work-related expense at tax time, you may recall that in previous financial years there were three ways to claim the tax deduction for your motor vehicle. These were:

• the kilometre method;
• the 12 per cent of original cost method; or
• the one-third of running costs method depends on which method that would give you the best deduction.

However on 1 July 2015, the Australian Tax Office (ATO) removed the old 12 per cent of original cost and one-third of running costs methods. There are now only two methods for calculating your car expenses:

• the ‘cents per kilometre’ method; and
• the ‘log book’ method.

How the Cents per Kilometre Method Works

Under the cents per kilometre method, you can calculate how much you can claim by multiplying the business kilometres you travelled (up to a maximum 5,000 km), by a cents per kilometre rate.

For the 2015 financial year, there were three rates available depending on your car’s engine capacity, with the maximum rate being 77 cents per kilometre. From 1 July 2015, the ATO have simplified the cents per kilometre method to a single rate of 66 cents per kilmetre no matter what your vehicle’s engine capacity is.

This is unfortunate news for those who use this method with their larger sized car as the rate is no longer determined by your car’s engine capacity; the flat rate does not account for higher costs required to run a large car.

If you’re using this method, you only have to show how you calculated the work related kilometres. Diary records will be sufficient.

Example

Jane travelled 6,000 business kilometres during the income year. Jane worked out she could only claim up to 5,000 business kilometres using the cents per kilometre method, as follows:

5,000 km x $0.66 per km = $3,300

How the Log Book Method Works

This method is most advantageous if you travel a significant number of kilometres for work purposes during the financial year. Using the logbook method, your tax deduction claim is based on your car’s business use percentage. Your business use percentage is the percentage of kilometres you travel in your car for business related purposes.

To work out the business percentage, you will need to keep a logbook for your car for a “typical” 12 week period. These must be 12 consecutive weeks (ie. 12 weeks in a row), and must include every trip you take during that period, not just your business related trips.

Your logbook must include the following detail:

At each entry:

• the date the journey began and the date it ended for each day if journey longer than a day;
• the odometer reading at the start and end of the journey;
• the number of kilometres the car travelled on the journey;
• the reason for the journey.

In each log book:

• the period the log book begins and ends;
• the odometer readings at the start and end of the log book period;
• the total kilometres travelled during the log book period;
• the business kilometres;
• the percentage of total kilometres that were business during the period.

Example

At the end of the income year, Jane’s logbook shows she travelled a total of 11,000 kilometres, of which 6,600 were for business.

To work out the percentage the car was used for business purposes, Jade made the following calculation:

6,600/11,000 × 100 = 60%

Jane’s total expenses, including depreciation, are $9,000 for the income year. To work out how much he could claim, Jane completed the following calculation:

$9,000 × 60% = $5,400

The changes made by the ATO hope to modernise the car expense deduction rules, and simplify the way taxpayers make these types of deductions. If you intend to claim motor vehicle expenses in your future tax returns and are unsure of what will be the best method for you, please don’t hesitate to contact our accounting team on 1300 726 082.

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Kezia Eman is an accountant with The Hopkins Group (John Hopkins Accounting Pty Ltd). This blog post contains general advice only, which has been prepared without taking into account the objectives, financial situation or needs of any person. You should, therefore, consider the appropriateness of the information in light of your own objectives, financial situation or needs.