Claiming Motor Vehicle Expenses

Motor vehicle expenses are a common work expense, yet the laws are complex, and clients frequently fail to keep adequate records to allow them to both maximise their tax deduction as well as satisfy the scrutiny of the Tax Office. This page is a brief overview of how to properly claim your motor vehicles.

1. If your business is owned by a company or trust, and you run your vehicle through the company or trust
The costs of running the vehicle are fully tax deductible; however, the Fringe Benefits Tax (FBT) laws apply to either make your business pay FBT on your private (fringe) benefit, or you reimburse the business with the value of the private benefit. That reimbursement is rarely cash, but rather a book entry made by us. The effect of the book entry is to eliminate FBT; however, the value of the fringe benefit is treated as income, and you also owe the business the value of the benefit.

There are two methods of valuing the fringe benefit:
1. The Statutory Formula Method - the simplest method, based on the number of kilometres the vehicle travels and the cost of the vehicle. This method can generate a net tax deduction for a vehicle that has little or no work use (for example, a spouse's vehicle). However, relying on this method can also expose a business to unnecessary tax.

2. The Operating Cost Method - relies on a log book being kept for 13 weeks, as well as a calculation of operating costs for the FBT year, that is, 1 April to 31 March. Keeping a log book for a vehicle that does significant work kilometres can reduce taxation. A problem with this method is that the operating costs must be increased by an assumed rate of interest. This therefore increases the value of the benefit, which in turn increases the tax, which is unfair to a business which owns its vehicle unencumbered.
A third option that can be used if the above options are not suitable, is for the business to pay you a car allowance or increased salary, then you pay for the car personally, and claim the costs via the methods at item 3 below.

2. If you are a salary and wage employee, and your employer provides you with a vehicle
The obligation to comply with the Income Tax and FBT laws is with your employer, not you. However, your employer may request that you keep records to assist with the calculation of the FBT. Salary packages offering vehicles as a substitute for salary can in certain circumstances benefit both the employer and the employee. A benefit to the employee will usually arise if the employee uses the vehicle extensively for private use. The value of the vehicle will be shown on your Group Certificate as a Reportable Fringe Benefit.

3. If you are self-employed, either as an individual or as a partner, or if you are a salary and wage earner, and you use your vehicle for work
There are a number of methods for claiming your vehicle:
If you travel less than 5,000 km per year for work, you can only use:

1. The Cents Per Kilometre Method
The claim is based on a reasonable estimate of the kilometres travelled for work. The Tax Office commonly states that the reasonable estimate must be supported by diary entries, however, we have seen many instances where a Tax Office audit has allowed a reasonable estimate to be based on detailed written explanations of systematic work-related travel. The point is, the reasonable estimate must be just that, rather than a guess or a false, over-stated claim. The tax deduction is then simply the work kilometres multiplied by a set rate per kilometre. The set rate is published annually by the Tax Office, and is based on the vehicle's engine size. For example, for vehicles with engines less than 1.6 litres, the rate is 51c per work kilometre.

2. The Log Book Method
You must keep a log book for 13 weeks. Once you have kept it, it is valid for 5 years, unless work travel changes significantly. It's not just any log book, it must be a log book that complies with tax laws. These can be purchased from most newsagents and stationers. These log books are designed to show the work kilometres and the total kilometres travelled during the 13-week period. That establishes the business percentage, which is accepted by the Tax Office as representative of the full year. You must also keep receipts for all expenses, such as registration, insurance, services etc. However, a recent Tax Office Determination allows fuel expenses to be claimed according to odometer readings, rather than receipts. The taxpayer needs the average price of fuel per litre and the per-litre fuel consumption of the vehicle to claim under this method. The tax deduction is therefore the work percentage times the running costs, including any depreciation, interest or lease costs.

If you travel more than 5,000 km per year for work, you can only use:

1. A flat claim of 5,000 km times the set rate according to the vehicle's engine size.
2. The Log Book Method
As explained above.
3. One Third of Running Costs
Identical to the log book method, except that instead of keeping a log book, you simply claim one third of the running costs.
4. 12% of Cost Method
The tax deduction is simply 12% of the vehicle's cost. You must of course be able to produce proof of the vehicle's cost.

There are a number of important points that go hand in hand with the above:

	You must be able to show that you travel more than 5,000 km for work if you use the last 2 methods.
	Work travel does not include travel to and from your regular place of work, unless you have to significantly divert from your usual route for a work related task.
	The Tax Office have sophisticated auditing techniques, especially in proving that log books are incorrect or fraudulent.
	Certain work vehicles are completely excluded from both the FBT and the Income Tax vehicle laws. These include utilities, panel vans, buses, and taxis, but not station wagons.
	Where a vehicle tax deduction is claimed, any vehicle allowance paid to you must be declared as income.
	The most important point is that if you keep records to satisfy all methods, especially log books, you minimise your exposure to tax, without the risk of having your deduction denied and penalties imposed.
	Finally, if you are not sure how your particular situation fits into this legislative labyrinth, please call us to discuss.

5. GST Requirements
a) How To Claim Input Tax Credits for Car Expenses:
General Rule – Where the business use for your car for Income Tax purposes is the same as it’s use for a GST Creditable purpose, you can use your business use percentage as your extent of creditable purpose. This will occur in most cases. However, a difference will arise between the two where you use your car for deriving income from activities that are not subject to GST (for example, for employment purposes) or are Input taxed (for example, travelling to Inspect a residential rental property). Where you use your car for these other purposes, you will have to adjust your extent for creditable purpose to take account of these non-creditable uses.

Note, the Bulletin specifically provides:

"If you are an employer who supplies a car to an employee, the private use of the car by the employee will not affect the extent to which you use the car for a creditable purpose. In allowing the employee the benefit of using the car, you are still using the car for the purpose of your enterprise. It is the use you make of the car that determines the extent of creditable purpose."

This means, the employer will be entitled to claim full in put tax credits, even though the employee may be using the car partly for private purposes.

This means, the employer will be entitled to claim full in put tax credits, even though the employee may be using the car partly for private purposes.

Where the estimate of business kilometres is the same as the at used for Income Tax purposes, excluding any travel in respect of employment or making input taxed supplies.

Business and total kilometres can be estimated from odometer readings, service records or any other reasonable basis.

b) Cents per Kilometre Method:
The Australian Taxation Office has stated in the Bulletin that if a reasonable estimate of the kilometres you travel for a creditable purpose does not exceed 5,000 you can use the following set rates:

This is called the set rate method. Note that it can be used where the estimate of kilometres that you travel for a creditable purpose does not exceed 5000. The total kilometres or even the business kilometres for income tax purposes, can be greater that 5000.

c) 12% or 1/3 Method
If you use either 1/3 or 12% method and your estimated kilometres travelled for a creditable purpose is more than 5000, the Commissioner will accept that your extent of creditable purpose is 331/3 %. Like income tax, you must still show how you worked out your business kilometres.

d) Log Book Method
If you maintain a log book and all the business use of your car is for a creditable purpose, the Commissioner will accept that the percentage of business use obtained for Income Tax purposes can also be used as the extent of creditable purpose. However, if not all business kilometres are entirely for a creditable purpose, you must reduce your extent of creditable purpose accordingly.

The Commissioner will accept that the log book method establishes the extent of creditable purposes for 5 years, provided you are not required to keep a new log book or your portion of non creditable use does not change.

Summary
As a result of the issue of GSTB 2000/2 you now have a number of alternative methods by which to calculate the extent of your creditable purpose for car expenses.

Formula method – you can use this method no matter how many creditable purpose kilometres you travel. Set rate method – only available if your creditable purpose kilometres does not exceed 5000. 1/3 creditable purpose method – only available if your creditable purpose kilometres exceed 5000. Log book method – you may use this irrespective of the number of creditable purpose kilometres you travel.

The above methods apply to all types of vehicles including those, such as utilities, exempted from the four income tax methods.