How do I maximise the tax deduction for my car?
The way to obtain the largest tax deduction for your car is by producing a logbook to give to your accountant. Keeping a logbook will enable you to receive a tax deduction that will lead to substantial tax savings.
For the logbook method to be effective you need to take an odometer reading at 30 June each year. This needs to be given to your accountant who will report it in your tax return. If you don’t take an odometer reading the Tax Office will reject your claim in an audit.
You will need to keep a record of your car’s running expenses for the entire income year including:
- Interest paid
- Lease payments
If you purchase a new car, your accountant will require the sale contract of the old car and purchase contract of the new car, as well as any schedules showing the terms of the agreement.
The objective is to determine the percentage that your car is used for business purposes. This is called the business-use percentage. To work this out you need to know how many business kilometres you travel each year. The Australian Taxation Office recognises a logbook as the best way to estimate the number of business kilometres travelled. You need to log each business journey for a continuous 12-week period which is representative of your annual business kilometres travelled. You can keep the logbook for 5 years before you need to prepare a new logbook. Each year you can check to see if you need to prepare a new logbook by referring to your current logbook.
An easy way to obtain a logbook is by visiting your local newsagent or stationery shop. Alternatively, you can make your own using a diary, a spreadsheet or your calendar.
Here’s how you do it:
- Determine the odometer reading in your car on the first day of the 12-week period.
- Document every business journey in the 12-weeks showing the odometer reading at the start of the journey and the odometer reading at the end of the journey.
- Determine the odometer reading in your car on the last day of the 12-week period.
Now you can determine the percentage of the car used for business purposes.
You cannot backdate a logbook. It must be a current logbook. A current logbook is a logbook created in the correct format for a continuous 12-week period within the last 5 years. In an audit the Australian Taxation Office is likely to ask for a current logbook. Therefore make sure you have a current logbook.
You will need a new logbook if the business-use of your car significantly changes, that is, if the number of kilometres you travel for business purposes dramatically increases or decreases.
A logbook can show a high or low business-use percentage, it might be 5%, or it could be 95%. There’s no right or wrong business-use percentage. You need to determine a percentage that reflects the actual usage of your car for business-use. A logbook is your responsibility. Nobody can do it for you. You need to keep a logbook if you want the largest possible tax deduction for your car.
If you use more than one car for business purposes you need to keep a logbook for each car. However, you don’t need a new logbook if you replace a car with another and use the new car the same way for business-use.
If you start your logbook just prior to the end of a financial year, you can continue the 12-week period into the new financial year, as long as the 12 week period is continuous. This is a common query asked by business clients.
If your car is owned or leased by somebody else (for example, a borrowed car or a registered in the name of your spouse) you can only claim the running expenses you actually incur for business purposes. If the owner of the car pays insurance and registration, and you pay for all other running expenses, you cannot claim the insurance and registration expense.
You need to keep your logbook in a safe place for 5 years.