What Car Expenses Are Tax-Deductible? Learn The Rules

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The first step to getting money back on your tax return is learning some key ATO rules.

You want to learn what car expenses are tax-deductible so you know how to keep your records straight. This makes the difference between a neat tax return and getting penalised for poor record-keeping.

Now get this: 70% of logbooks are found to have technical errors. Knowing this, the taxman is always on the lookout for reporting irregularities.

For the average taxpayer, discussing tax rules means entering uncharted territory. This is where questions proliferate.

Today we’re answering these questions. Learn the rules and you have nothing to fear.

Car Expenses: What Are the Ground Rules?

To make sure you’re on the right track when claiming car expenses, keep these three rules in mind. You’re entitled to claim only expenses:

  • That you incurred for business and not private purposes
  • That you covered for yourself
  • For which you haven’t been previously reimbursed in any way

This is exactly why you should keep a logbook – to separate private and business use of your car. Use it to document to the ATO the part of your expenses that relate to work purposes.

Before we get into more details on what you need to get your deduction, let’s look at the two golden ATO rules. You can claim car expenses if you’re:

  • A sole trader or an employee and you use your own car in the course of performing your business.
  • A business owner and you or your employees use a company car for work-related purposes.

Which Car Expenses Are Tax-Deductible?

If you already have a lot of ground to cover while on duty, you might as well lodge your tax return for all that mileage.

At the first “junction” on your way to claiming your deductions, you’re faced with two methods to choose from:

  • The cents per kilometre method or
  • The logbook method.

The two methods have their pros and cons, but differ in terms of which car expenses you can claim.

Opt for the cents per kilometre method and you’ll be able to claim only a set rate for each business kilometre you drove. But you’ll be missing out on claiming any depreciation expenses for your vehicle.

The logbook method allows you to claim your actual car expenses, including:

  • Fuel and oil costs
  • Repair
  • Insurance
  • Registration
  • Lease payments
  • Vehicle depreciation

Nothing will motivate you to keep a logbook like knowing how much your car costs can add up during the year. The image below should encourage you to reevaluate your priorities.

poster sticker car chart

What Kinds of Trips Qualify for a Tax Deduction?

Your number one concern when logging your business mileage is to keep your records straight. Any misunderstandings can lead to cardinal mistakes. And cardinal mistakes can attract ATO penalties for filing inaccurate records.

This is why you should know which drives you can classify as work-related. You can legitimately claim expenses when you use your car to:

  • Travel to work-related conferences
  • Collect supplies, deliver items or attend meetings away from your normal workplace
  • Drive between two separate places of employment
  • Travel from your normal workplace to an alternative workplace, back to your normal workplace or directly home
  • Transport bulky tools and equipment necessary for performing your job
  • Perform itinerant work
car expenses chart
Screenshot from: Australian Government

Are Trips Between Home and Work Considered Business Mileage?

Well, wouldn’t that be nifty? Yet, the answer is a resounding NO. According to the ATO rules, drives between home and work don’t qualify as a business expense.

You can’t claim expenses in these cases even if you pick up your business mail on your way home.

On a similar note, even if you need to take multiple drives to work due to work-related issues (e.g. attend a parent-teacher conference as a teacher), you can’t claim a deduction for those drives.

They’re considered private trips.

Still, there are exceptions to the rule. The claim for travel between home and work is reserved for people who’ve registered their home as their primary workplace. Note, though, that the claim is only valid when you travel from your home office to another workplace.

What Conditions Do You Have to Meet to Claim Car Expenses?

We’re not through yet! We never said getting money back on your tax return is easy. But it does pay off (literally!).

The sections below will help you organise your thoughts on tax deductions, whether you’re flying solo or running a company.

Does Your Vehicle Qualify as a Car?

Heads-up to people driving vans, trucks or nine-seater cars for work. You’re not allowed to claim work-related deductions under car expenses.

Let’s make things clear. To meet the ATO requirements, your vehicle needs to fit the definition of a car – to the letter.

“A car is defined as a motor vehicle (excluding motorcycles and similar vehicles) designed to carry a load less than one tonne and fewer than nine passengers. Many four-wheel-drive vehicles are included in this definition.” Source: Ato.gov.au

If your vehicle doesn’t fit the definition, you can still claim work-related expenses. But note that you can do so only under travel expenses.

What Can You Claim as a Sole Trader?

Do you still get confused about who’s eligible for car deductions? Well, here’s a simple and unambiguous answer:

  • Sole-traders
  • Employees
  • Companies and trusts

There are slight differences in tax claiming for each of these categories, and your claim is limited to certain circumstances as well.

You may be using your own vehicle to earn your livelihood. Let’s say you’re a sole-trader who operates ride-sharing services. Or you could be an employee working in a company using your own vehicle for business purposes.

You’re eligible in both of these cases.

Now let’s look at the sole-trader’s side of the fence.

As a sole trader, you can claim the car operating costs that you incurred during your work-related drives.

But here’s some more glad tidings. If you operate your business from a home office, you’re entitled to claim expenses even for those drives, as long as they’re work-related.

To illustrate, let’s say you’re a professional painter working from a home office. Your claim is legit if you visit a restaurant to talk business with the owner about restaurant remodelling.

Inversely, chancing upon a restaurateur who becomes interested in your services as a result of a leisurely dinner chat doesn’t make your drive to the restaurant eligible for tax return. The same holds true if you buy your pad painter or a doughnut roller on a private shopping trip.

To sum up, you can’t categorise a trip as business-related even if you sealed a deal or bought supplies during a personal drive. Make sense?

What Can You Claim as a Company?

As a company, you can claim deductions for work-related use of your company-owned cars. You can also do so when you provide a car to your employee.

Bear in mind that if an employee uses a company car for private purposes, you’ll have to pay the Fringe Benefits Tax (FBT). But there’s no reason to worry – these expenses are also tax-deductible.

Use a Logbook App to Stay Sane at Tax Time

After all is said and done, you don’t have much use for all this legal ATO talk if you don’t start acting on it immediately.

Now that you know which car expenses are tax-deductible, all you need to do is provide evidence to support your tax deduction claim. And of course, backsliding to pen and paper is not an option in the 2020s!

Regardless of your line of work or employment status, a good logbook app can be a lifesaver. This is by no means an understatement.

What was once a tedious job that took hours to complete, today is a matter of few swipes on your phone.

A solid logbook app can get you through all the steps of logbook keeping: logging your mileage, classifying the trips and preparing reports for the ATO.

A handy app like GOFAR will seamlessly accomplish all of your logbook keeping for you. All you need to do is follow through with your tax savings.

GOFAR is the only app that you’ll ever need to log your mileage because it:

  • Tracks every last bit of your mileage without the need to fiddle with your phone.
  • Nominates your trips as business or personal with just one swipe.
  • Tags your typical locations automatically according to destination.
  • Lets you choose the most lucrative time section for your 12-week logbook.

Have you lost enough mileage for a lifetime? See how GOFAR can raise your game.

Or get GOFAR now and start saving on your taxes in a big way!

Track Work Mileage With GOFAR

  • Log, calculate and export business expenses at the press of a button
  • No ongoing fees
  • Available on iOS and Android

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GOFAR mileage tracker app on a white smartphone screen
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