Car tax deductions – How to claim the right way & maximise your tax refund

There’s no doubt that claiming for your work-related car expenses at tax time is one of the great joys of life! However, you must be certain that you have strong documentation to substantiate your claims. Making unfounded claims for motor vehicle expenses can lead to audit activity, back paid interest for the money you’ve been refunded & hefty fines from the Australian Taxation Office.

As audits are based on deduction amounts – in addition to targeting claims that are obviously fraudulent, they also point their finger at many unsuspecting claimants who genuinely understand the system. These people were just simply unaware of all the regulations regarding car tax deductions and failed to provide the necessary information when lodging their claims.

Understanding these guidelines can help you maximize your tax deductions, whilst also avoiding any unpleasant surprises should you ever come under the ATO’s microscope.

Claimable car expenses

If you are expected to drive a car in your role, there are many circumstances in which you would be eligible to claim a car deduction.

Here are some quite common situations where you can claim a car tax deduction:

Travel to attend business gatherings such as training seminars or off-site interviews
Trips made with the purpose of gathering and/or dispatching goods
Journeys between numerous locations during the course of your working day. This is especially the case for itinerant occupations such as real estate agents.

Depending on the method of claiming running costs associated with maintaining a motor vehicle may also be claimed as car tax deductions. Some of these costs include petrol, insurance premiums, motor vehicle registration, mechanic’s fees for conducting repairs and interest. To claim for these expenses, you will need to keep copies of all the receipts that you have acquired over the year.

The ATO myDeductions phone app has been developed to streamline the process of claiming your business vehicle tax deductions. However, you will still need to keep hard copy records of all your expenses.

What is not claimable?

Although it really goes without saying, journeys conducted during your private time must not be claimed as a car tax deduction. Additionally, any work trips that your employer has already reimbursed you for must also not be claimed against your taxation. Here are some other non-claimable examples:

Any miscellaneous jobs conducted on your way to or from work. This could include picking up some stationery for the office on your journey to work in the morning
Making multiple trips home during the working day
Any travel to your workplace that happens outside standard working hours. This would apply to front-line, emergency workers who can be called in to work at any time around the clock.
Your workplace is not easily accessible by public transport
You are engaged in your own business activities at home and then travel to a different location to commence working in your regular job

Home trips

Generally, your everyday, routine journeys from home to work and back again cannot be claimed as car tax deductions. Although there are some notable exceptions where you can claim for home trips:

You need to bring your large work utensils home with you at night because your workplace has inadequate storage facilities for those items.
You perform some of your work tasks at home before travelling to a different location to continue working for your employer
Travelling from your home to a job site where you wouldn’t typically work
Returning home from a job site that is not your principal place of employment.

The two methods of claiming car expenses

The following are two systems of recording work related vehicle expenses that are acknowledged by the ATO.

Cents Per Kilometre

A cap of 5,000 business kilometres can be claimed in this method
Currently, 72 cents per kilometre (as of 1 July 2020). The previous rate for the 2020 financial year was 68 cents per kilometre
All of your car expenses are taken into consideration
Depreciation of the cost of the vehicle is also covered under this method and no additional claims for depreciation can be made
Journeys can be recorded in a diary or calendar

The Logbook Method

Usually for claims that exceed 5,000 business kilometres
A logbook is used to record all work-related journeys
Must include detailed descriptions of each journey – Start and finishing dates, number of kilometres, odometer readings, destinations and reasons for the trips
You need to record your journeys for a total period of 12 consecutive weeks and that period is then considered indicative of your travel activity & this period will be the basis for your next 5 years of claims
You will still need to take odometer readings at the commencement and completion of each year during this time
The logbook must be kept for the entire five years (either digitally or physically)
Your record entries are used to calculate the overall percentage of business-related travel during the period.

Please note that these two methods of claiming car expenses are not applicable to companies and trusts. For these types of entities, car expenses can only be claimed through the provision of receipts.

What records for car deductions do I need to keep?

When the ATO conduct their routine audits on car tax deduction claims, they review the written evidence kept by claimants. If your records contain insufficient or inaccurate details, you could be fined for making an unsubstantiated claim. One such scenario would be falsifying a logbook entry to indicate that you had made a work trip on a day when you were actually on annual leave.

The ATO will scrupulously cross-check the source material against the employer’s records to verify the accuracy of car expenses claims. If you leave out crucial details from your logbook entries (such as failing to list the destination of one of your work trips), you could disqualify your entire claim. For example, one of your entries reads “13/08/2020 – Client Visit”. A more detailed and thorough entry would be “13/08/2020 – Visit to David Smith (Client) in Richmond”. Although recording the details of your work journeys can be difficult and time consuming, this is an essential requirement for claiming car tax expenses.

Unsure where to go from here?

If you have any questions about car tax deductions, or any other taxation matter, our experienced professionals would love to speak with you. Please give us a call today on (03) 8568 3606.