George Smith is an experienced real estate agent who has been working in the industry for a number of years and completing his own tax returns. George has never maintained a log book for his car and has been estimating his business kilometres for his prior year deductions. He has not kept any receipts once he has lodged his tax return.
Recently George had a discussion with a colleague regarding how he claimed work related car expenses and realised he hadn’t been doing things correctly and there could be some tax advantages in doing things more accurately.
George probably isn’t the only one in this situation; chances are there are many taxpayers who are not claiming car expenses correctly and missing out on legitimate deductions. The Australian Taxation office allows taxpayers to claim expenses relating to their car for their business related usage.
So what constitutes business kilometres? Business kilometres are the kilometres travelled in the car in the course of earning assessable income. Generally travel from home to work is private and cannot be claimed. Taxpayers may be able to claim kilometres between home and work if they are carrying bulky items or equipment that are required for work.
A typical day for George is to travel to work from home. He goes to various appointments and returns to work to sort out any paperwork before heading home. In this case he can claim the travel from work to his appointments and back to work again, but travelling between home and work is regarded as personal.
George has a 2.0 ltr vehicle and he estimated that his business kilometres total 6,500 out of 10,000 km travelled for the year. George now knows he is entitled to claim work related car expenses in his tax return, but he is not sure which method to use. As George has estimated more than 5,000 business kilometres, he can use any of the four statuary methods available to him:
Method 1: Cents per kilometres No documentary evidence is needed other than to show how you have obtained the number of work related kilometres travelled. Only a reasonable estimate based upon a diary or similar records is required to substitute the claim. George’s 2.0 ltr SUV falls in the range of 1601 – 2600cc which is deductable at 74c per kilometre. The maximum number of kilometres that can be claimed under this method is restricted to 5,000km. So although George has estimated 6,500 km, the maximum deduction available to him is (5000 * .74c) $3,700.
Method 2: 12% of the original cost You do not need written evidence, but you do need to keep a record of how you obtained your work related kilometres travelled. This method is only available if total estimated business kilometres are more than 5,000km. George had paid $35,000 for his vehicle. The deduction available to George under this method is (35,000 * 12%) $4,200.
Method 3: One third of total expenses Under this method George can claim one third of the annual expenses incurred on the car. Expenses that can be claimed under this method are fuel, insurance, registration, repair & maintenance, tyres, depreciation and interest on finance. George has incurred the following expenses during the year: Fuel: $1,500 R&M: $500 Tyres: $700 Insurance: $800 Rego: $600 Depreciation: $6,250 Interest: $1,700 Total Expenses : $12,050 Deduction available to George is (12,050 / 3) $4,017
Method 4: Logbook In order to use the logbook method, he must maintain a logbook for 12 weeks under the format prescribed by Tax Law. Logbooks should include starting and ending dates along with the odometer readings. It should include total kilometres and business kilometres travelled during the period in order to determine total business usage of the car. Business usage calculated under the logbook can be used for up to five years unless there is a substantial change in business usage. Because George did not maintain a logbook, he cannot use this method. If George had maintained a logbook and his business usage was 65%, based on the expenses above, George could have claimed a deduction of ($12,050 * 65%) $7,832.
In order to have the best tax outcome, taxpayers must have written evidence for the expenses incurred and a basis on which they estimated the business usage of the vehicle (except logbook method). Taxpayers need to keep hold of their tax documentation for five years. It’s also important to note that taxpayer’s can choose which method they would like to use use from year to year based on which one will provide the best outcome.
If you would like further information, please do not hesitate to contact our office on 1300 302 724.