A tax deduction is available for motor vehicle expenses if you use your car to gain assessable income. This involves travel in your car which is solely undertaken in performing your work/investment duties.

A deduction for car expenses can be calculated by using one of the following methods:

         Cents per kilometre
        Log book
        12% of original value
        One third of actual expenses      

When completing your income tax return, we will consider your situation and claim car expenses by using the most tax effective method.

‘Cents per kilometre’ method

Under the cents per kilometre method your claim is calculated by multiplying the number of business kilometres travelled during the year by the statutory rate as determined by the Taxation Office. The relevant statutory rates for the 2010 financial year are:

Engine Size of Car          Rate per Kilometre    
Up to 1.6 litre                   63 cents
1.601 litre - 2.6 litre           74 cents
More than 2.601 litre        75 cents      

Regardless of how many business kilometres the car travelled during the year, the claim is limited to a total of 5,000 business kilometres per car per individual. If you are using your car for more than one income earning activity (such as employment related use and for inspecting your rental property) you can only claim a total of 5,000 kilometres over all income earning activities.

An individual is, however, entitled to claim a maximum of 5,000 business kilometres for each car they own. Therefore, if an individual owned three cars and undertook business trips totalling more than 5,000 kilometres in each car, they could claim up to a maximum of 15,000 business kilometres using this method.

More than one taxpayer may claim business kilometres for the same car. For instance a husband and wife can claim up to 5,000 kilometres each for the same car, provided these trips were undertaken separately and for business purposes.

Record keeping

The statutory rates listed above take into account the average running costs of your car. Therefore you do not need to substantiate (or keep a good record of) your car expenses under the cents per kilometre method. However, you may be required to show how you arrived at your estimated business kilometres and show proof of ownership.

‘Log book’ method

This method can be used regardless of the number of kilometres you travel for work each year. Under the log book method, your deduction is calculated by multiplying the running costs of the car (including depreciation, subject to the luxury car limit of $57,180 for 2010 and $57,466 for 2011) by the business use percentage as indicated by the log book.

A log book gives a representative business use percentage for your car. The log book should therefore be maintained during a period which represents normal business use allowing for holidays, busy times of the year, long trips and sickness.

The log book must be maintained for a continuous period of at least 12 weeks. This continuous 12-week period may overlap the start or end of the income year, so long as it includes part of the year. Once a log book has been maintained it can be used for up to five years, provided the business use percentage does not change by more than ten percent during the five year period. You will need to maintain a new log book in the 2011 financial year if you have not kept one since the 2006 financial year.

During the log book period you must make the following entries into your log book after each journey is completed:

         the date the journey began and ended
         the car's odometer readings at the start and end of the journey
         how many kilometres the car travelled on the journey
         the purpose of the journey. It is essential to provide a clear description of
         why the trip was undertaken, for example, "Ten customer calls, Bathurst -
         Orange area" (writing "B" for business or "P" for private is not sufficient).

Private journeys do not have to be recorded in your log book. However, the following must also be entered in the log book:   

         when the log book period begins and ends
         the car's odometer readings at the start and the end of the logbook period
         the total number of kilometres that the car travelled during the period
         the number of kilometres that the car travelled on journeys recorded in
         the log book, in the course of producing your assessable income, and
         the number of log book business kilometres expressed as a percentage
         of the total log book kilometres.

In most cases, a journey from home to a place of work or business is regarded as a private journey.

Record keeping

You should provide Childcare Accounting and Financial Services with a copy of your log book in the year in which it is maintained. You must also record the odometer reading of your car at 30 June each year. To enable us to calculate your claim we recommend you keep a record of all running costs for your car each year, such as registration, insurance and servicing. Childcare Accounting and Financial Services can calculate your estimated fuel costs if you have not kept records of this expenditure. To calculate the fuel claim we will require the engine capacity of the car and the vehicle’s odometer reading at the beginning and end of the financial year. If the car is financed, we will require a copy of the finance agreement contract.

Changing cars during the year

If you are using the log book method and you change cars during the year, you can continue to use the same log book percentage for the replacement car if you nominate the new car to replace the existing car. This nomination must be made in writing and takes effect from the date specified in the nomination. After the nomination, the replacement car is treated as the original car and you will not need to keep a new log book for the replacement car. The nomination must be completed before lodging your income tax return for the relevant year.

‘12% of original value’ method

You may only use this method for claiming car expenses if your car travelled more than 5,000 business kilometres in the income year. This can be pro-rated over the year if your car was acquired or disposed of during the year. For example, if your car was purchased on 1 January 2009 and travelled 3,000 business kilometres to 30 June 2009 the annualized kilometres is 6,000. To claim a deduction under the 12% method, the cost of the car is multiplied by 12%. If the car is leased, the market value of the car at the commencement of the lease is multiplied by 12%. The cost of the car is capped at $57,180 (luxury car limit) for the 2010 financial year. If the car was purchased or disposed of during the year, the deduction is then apportioned over the number of days the car was owned.

Record keeping

You can justify your claim by making a reasonable estimate of the business kilometres travelled during the year. To claim car expenses following this method we will require a copy of the purchase contract of the car.

‘One-third of actual expenses’ method

You may use this method for claiming car expenses only if you travelled more than 5,000 business kilometres in the income year. This can be pro-rated over the year if your car was acquired or disposed of during the year.

Using this method, your claim is one-third of the running costs of your car for the financial year. If your car was not used for work purposes for the whole year, you can still claim one-third of the total expenses for the entire year. This is available if the car travelled (or would have travelled if owned for the whole year) more than 5,000 business kilometres in an income year.

Record keeping

To use this method you must make a reasonable estimate of business kilometres travelled and also keep a record of all running costs for your car each year, such as registration, insurance, servicing and financing repayments. As discussed in the section relating to the log book method, Childcare Accounting and Financial Services can calculate your estimated fuel costs if you have not kept records of this expenditure, provided you have maintained odometer readings at the beginning and end of the financial year.

Other issues

There are a number of issues that must be considered by every taxpayer wishing to claim a tax deduction for car expenses regardless of the method used.

Travel between home and work

Typically, travel between home and work is considered to be private and therefore not deductible. This travel is private and cannot be claimed even if:

         you complete minor tasks, such as picking up the mail, on the way to work
         you are on-call or your work shifts, or
         there is no public transport near where you work.

However, you can claim a deduction for travel between home and work under limited circumstances, such as if you are required to transport bulky tools and equipment between home and work and you cannot store these items at work.

Travel between jobs

If you have more than one job you can claim deduction for travel directly between the two jobs. You cannot claim travel between two places of work if you reside at either workplace.

Travel to visit Childcare Accounting and Financial Services or the Tax Office

Travel to visit Childcare Accounting and Financial Services or the Taxation Office can be claimed as a deduction. If the claim was under the cents per kilometre method the travel is not counted towards the 5,000 business kilometre limit.

Sale of the car

If at any time during the car’s ownership a claim was made following the log book or one-third of actual expenses methods, the profit/loss on sale must be included in the income tax return in the year in which the car was sold. This is known as a balancing adjustment and is calculated as the difference between the sale proceeds and the written down value for depreciation purposes. The balancing adjustment is apportioned according to the business use of the car.

Record keeping for GST

If you are registered for GST, you will need to keep all of your tax invoices in order to claim the correct amount of input tax credits. If a log book was maintained, the percentage of input tax credits claimable is the log book business use percentage. If the car has been used for both earning business and employment income, this percentage needs to be further apportioned for business use only.

If no log book has been maintained and you use the cents per kilometre method to claim car expenses for income tax, the percentage of input tax credits which can be claimed for GST purposes is dependent on the number of kilometres travelled for work. The following table illustrates the percentage of GST claimable:

Kilometres Travelled              %
< 1,250 kilometres                  5%
1,251 – 2,500 kilometres        10%
2,501 - 3,750 kilometres         15%
3,751 – 5,000 kilometres         20%

If you claim motor vehicle deductions under the ‘12% of original value’ or ‘one-third of actual expense’ methods, you are entitled to claim one-third of input tax credits on your motor vehicle expenses      

Exit from GST System

This is reasonably complicated however in brief the GST on the market value of the asset/s on the date of your exit from the GST System must be included in your last Business Activity Statement. This effectively realizes the proportionate true value of the GST to the business of the assets whilst the business was registered for GST.

If you are exiting from the GST System please contact Childcare Accounting and Financial Services for advise and we will be able to fully advise the implications of the cessation as they apply to your particular circumstances.