Car Expenses 101: How to Maximise Your Work-Related Tax Deductions

Photo: Ken Teegardin

Claiming your car expenses is not without its challenges. But the most daunting challenge is knowing how to navigate the complex tax return process so you maximise your work-related tax deductions.

If you cover a decent mileage for work, odds are you’re spending a lot towards your work-related car expenses. This can be measured in the thousands of dollars.

So, instead of throwing that money out the window, you can do the exact opposite. Brace yourself, you’re edging closer to a viable action plan that will earn you a maximal tax deduction.

Here you’ll learn car expenses 101.

Do Some Tax Planning

The tax authorities expect you to fulfil your obligations under income tax laws. And although you’re free to do some planning to keep your taxes to a minimum, you should do so within the law.

With a little bit of forward-thinking (and some professional help), you can get your tax year off to a good start and increase your tax savings. Here are a few strategies you can try out to cut down on that hefty tax bill.

  • Figure out what expenses have a positive effect on your total tax amount.
  • Learn which work-related items are tax-deductible and make smart, tax-reducing investments.
  • Be aware of all deductions you’re eligible for so you maximise your tax return.

Be careful about how much time you’ve got left on the clock for claiming your car expenses. Lodge your tax return before the October filing deadline and you’re on your way to a lucrative tax deduction.

https://www.ato.gov.au/General/Tax-planning/

Shoot For the Maximum Tax Refund: Know Your Numbers

To get the largest tax return possible, you need to do these two things very well:

Learn your way around the system and make it work to your advantage. Below is the overview of the two methods available to Australian taxpayers. Decide which one suits your needs best and pick it as your go-to method.

Cents Per Kilometre Method

Choose the cents per kilometre method and you won’t have to toil away too much when it comes to record-keeping.

Work out the number of your business kilometres and you’ll be able to claim your car expenses using a fixed rate. The rate the ATO allows for the 2020 income year is 68 cents per kilometre.

However, this method allows for a limited claim of up to 5,000 business kilometres. Meaning your maximum tax deduction in this case is $3,400 (5,000 x $0.68).

Want to figure out how much you can claim using the cents per kilometre method? Here’s a real-life example for you.

Amelia is a company accountant for a small business. Each day she makes the rounds to local business branches. She picks up and drops off the post and pays bank visits. She drives roughly 20km a day for work-related purposes.

To claim her work-related tax deductions, Amelia makes the following calculation:

  • 20km x 5 days = 100km per week
  • 100km per week x 48 weeks (Amelia takes 4 weeks off each year) = 4800km
  • 4800km x $0.68 = $3,264

It follows Amelia can claim $3,264 using the cents per kilometre method. Not too shabby, is it?

Key takeaway:

If setting aside extra time for record-keeping is not an option, this method is a good fit for you.

Also, if your work-related trips are scarce and sporadic, this method will fit you well.

Logbook Method

Keeping extensive records is what’s giving the logbook method a bad name.

But there’s another side of that coin. Keeping more detailed mileage records can help you maximise your tax savings.

Here’s how it works.

To claim your car expense deduction, you need to keep a 12-week logbook and use it to log your trips. When the logbook period is over, you calculate the percentage of your car business use.

You need to keep receipts of your car expenses during the year so you know exactly how much you’ve shelled out for your car. It goes without saying, the ATO allows you to claim only the work-related part of your expenses.

Here’s an example to illustrate how the logbook method plays out in a real-life setting.

Ethan is a tradesman who’s chosen the logbook method to claim his car expenses. At the end of the logbook period, Ethan divided his work-related kilometres by the total mileage he had travelled. Then he multiplied this by 100.

Ethan travelled 1550 km in total during the 12-week logbook period. He travelled 1300 km on work-related trips.

  • 1300km ÷ 1550km = 0.83
  • 0.83 x 100 = 83%

This is Ethan’s work-related percentage.

Next, he added up his total annual car expenses, which amount to $10,440. He multiplied this amount by 83% and this is how he arrived at his tax-deductible amount.

  • $10,440 x 83% = $8,665

Now, think about it this way. You can get a maximum tax deduction of $3,400 under the cents per kilometre method. Or you can earn yourself thousands more, depending on how much you drive for work.

That’s on you.

Key takeaway:

The logbook method will keep you busy with logbook records, but it will also enable you to earn more back on your taxes. The more you drive for work, the more you’ll be able to claim.

Anyone who drives their car extensively for work knows car expenses can get exceedingly steep. You can receive a decent amount of that money back by keeping a driver’s log.

The question is whether it’s worth the hassle for you or not.

Keep Good Records of Your Work-Related Trips

Record-keeping is an important factor when deciding between the two ATO methods. But whichever you decide upon, it’s unwise to go outside the rules.

Keep in mind that the devil’s in the details, so make sure you keep meticulous business mileage records.

Let’s kick it off with the logbook method. You need to prove your business kilometres with documentation, so here’s what you’ll need to record:

  • The start and end dates of the logbook period
  • The odometer readings at the start and end of the logbook period
  • The total mileage the car travelled during the logbook period

Now, what follows is the information you need to record for each trip during the logbook period:

  • The date you took a trip
  • Accurate odometer at the start and end of a trip
  • Kilometres you covered for each trip
  • Purpose of your work-related trip

Also, you need to track your car expenses (e.g. fuel, insurance, registration) by keeping receipts.

Besides, you need to keep track of your annual car odometer readings. You should record these at the start and end of the income year in which you began keeping a logbook. Also, track your odometer readings during the entire logbook timeframe.

Example of Logbook Method by ATO Tax Rates Info
Click the image to magnify

It’s much simpler to justify your claim using the cents per kilometre method. You only need to show how you came up with the number of your business kilometres.

This can be done by keeping a diary of your work-related trips.

Get a Logbook App That Maximises Your Work-Related Tax Deductions

If you want to maximise your work-related tax deductions, you can make this a reality. You’ll need some tax planning, a sound choice of the right ATO method and a knack for keeping good mileage records.

As annoying as it may get, this is easier said than done. Because it boils down to having to fill in pages of mileage records in paper logbooks.

But it doesn’t have to be that way. You can swap this time-intensive record-keeping with a piece of modern software known as a logbook app.

When you go to the trouble of keeping your mileage records, you may as well make it count. Finding a logbook app that logs your trips accurately is a clever way to get more back on your taxes.

GOFAR is an award-winning logbook app that will earn you a maximum tax refund. This amazing platform:

  • Logs all your mileage without exception with the help of an OBD2 device that plugs under your dashboard
  • Helps you classify the trips you can claim as a business expense with a single swipe
  • Enables you to choose the most lucrative logbook window
  • Makes sending your reports at tax time as simple as hitting the export button

So, your next step? Discover more about how GOFAR can simplify lodging your tax return. Or get the GOFAR app today and start getting more back on your taxes in a matter of days.

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

Get GOFAR now

GOFAR mileage tracker app on a white smartphone screen
Check Car Buy Now