MOTOR VEHICLE EXPENSES TAX SAVER - DEDUCTIONS

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1 D E D U C T I O N S I N D I V I D U A L M O T O R V E H I C L E MOTOR VEHICLE EXPENSES TAX SAVER - DEDUCTIONS Hynes Tax CLEARLYTAX.COM

2 D E D U C T I O N S I N D I V I D U A L M O T O R V E H I C L E 1 January 2014 The purpose of this Tax Saver is to provide a clear and concise summary of a key area of Federal taxation law in an easy to navigate format that includes references to legislation and other sources of taxation law. This publication is copyright. Other than for the purposes of and subject to the conditions prescribed under the Copyright Act 1968, no part of it may be reproduced in any form or by any means including electronic, mechanical, micro-copying, photocopying, recording or otherwise, stored in a retrieval system or transmitted without prior written approval. Enquiries should be directed to Hynes Tax. Disclaimer The information here should be considered general in nature, and in no way interpreted as taxation or professional advice. You must always seek your own independent professional advice about your particular situation. The summary is for information purposes only and is intended to provide a summary of Australian Federal Taxation laws as the above date. It is sold on the conditions that the authors, consultants and publishers are not engaged in rendering taxation advice or any other form of professional advice or services and are not responsible for the results of any actions taken based on information contained in this publication nor for any error in or omission from this publication. The authors, consultants and publishers expressly disclaim all and any liability and responsibility to any person or entity whatsoever, arising from the use of any part or the whole of this publication. Without limiting the generality of the above, no author, consultant or publisher shall be responsible for any act or omission of any other author, consultant or publisher.

3 1 P a g e D E D U C T I O N S I N D I V I D U A L M O T O R V E H I C L E Motor Vehicle Expenses Section 8.1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides for the deduction of outgoings necessarily incurred in gaining or producing your assessable income and is applicable in general to landlord costs: General deductions (1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. that: (2) However, you cannot deduct a loss or outgoing under this section to the extent (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. Work-related car expenses Division 28 of the Income Tax Assessment Act 1997 (ITAA 1997) provides: (1) If you owned or leased a car, you can deduct for the car's expenses an amount or amounts worked out using one of 4 methods. Note 1: see section For particular types of cars taken on hire you cannot use one of the 4 methods:

4 2 P a g e D E D U C T I O N S I N D I V I D U A L M O T O R V E H I C L E Note 2: subsection (2)). In certain circumstances the lessee of a luxury car is taken to be its owner (see Note 3: In certain circumstances (for example, under a hire purchase agreement) the notional buyer of property is taken to be its owner (see subsection (2)). (2) You must use one of the 4 methods unless an exception applies. If you can't use any of the methods, you can't deduct anything for the car expenses. Work-related car expenses incurred as an employee apply to the following cars: owned (even if it is not registered in your name) leased (even if it is not registered in your name), or hired under a hire-purchase agreement. Owned or leased cars Taxpayers can claim at work-related expenses for using a car that you owned, leased or hired (under a hire-purchase agreement). In general car expenses cannot be claimed relating to a car owned or leased by someone else, including your employer or another member of your family. However, individual circumstances are taken into consideration. If you owned or leased a car or hired one under a hire-purchase agreement, you can use one of the four methods explained in this question to claim your work-related car expenses. Depending on the method you choose, you will need to know or estimate your business kilometres. Business kilometres are the kilometres you travelled in the car in the course of using it for work-related purposes. Section contains the following information on the four methods of calculating car expense deductions:

5 3 P a g e D E D U C T I O N S I N D I V I D U A L M O T O R V E H I C L E You can choose one of four methods to work out your car expenses. If you qualify to use more than one method, you can use whichever gives you the largest deduction or is most convenient. These methods are: cents per kilometre 12% of original value one-third of actual expenses logbook. You must have the necessary evidence for the method you choose. Each method requires you to know or estimate your business kilometres. Business kilometres are the kilometres you

6 4 P a g e D E D U C T I O N S I N D I V I D U A L M O T O R V E H I C L E travelled in the car in the course of earning assessable income (includes work-related activities). The Australia Tax Office provides the following information on calculating car expenses and completing your tax return: Method 1: Cents per kilometre Your claim is based on a set rate for each business kilometre. You can claim a maximum of 5,000 business kilometres per car, per year. You do not need written evidence, but you need to be able to show how you worked out your business kilometres. Step 1 Multiply the total business kilometres travelled (maximum of 5,000 km per car) by the number of cents allowed for your car's engine capacity (see below). Rates per business kilometre Engine capacity Cents per kilometre Ordinary engine Rotary engine 1.6 litre (1,600cc) or less 0.8 litre (800cc) or less 63 cents litre (1,601-2,600cc) litre (801-1,300cc) 74 cents litre (2,601cc) and over litre (1,301cc) and over 75 cents Step 2

7 5 P a g e D E D U C T I O N S I N D I V I D U A L M O T O R V E H I C L E Divide your answer by 100 to work out the dollar amount you can claim. Step 3 If you are claiming for more than one car using this method, repeat the steps above and add up all the amounts. Step 4 Write the total at A item D1. Print the code letter S in the CLAIM TYPE box beside the amount. Example Joanne had a 2-litre ordinary engine car which she used to travel 300 km in performing her job during She claims a deduction of $222. Method 2: 12% of original value For you to use this method, your car must have travelled more than 5,000 business kilometres in the income year (or, if you used the car for only part of the year it would have travelled more than 5,000 business kilometres had you used it for the whole year, see step 1 below). Your claim is based on 12% of the original cost of your car, or 12% of its market value at the time you first leased it. The maximum deduction you can claim is 12% of the luxury car limit for the year you first used or leased the car. You do not need written evidence, but you need to keep a record of how you worked out your kilometres. Step 1 If you owned or leased your car for the whole year, go to step 2. If you owned or leased the car for part of the year, you will need to work out whether you can use this method. Firstly, work out the number of business kilometres travelled and multiply that number by 365. Then divide this amount by the number of days you had the car during the year. If your answer is more than 5,000 km you can use this method. Step 2

8 6 P a g e D E D U C T I O N S I N D I V I D U A L M O T O R V E H I C L E Multiply the cost of the car or luxury car limit, whichever is less, by Step 3 Go to step 5 if you owned or leased the car for the whole year. Step 4 If you had the car for part of the year, multiply the amount you worked out at step 2 by the number of days you had the car. Then divide by 365. Step 5 Write the total at A item D1. Print the code letter T in the CLAIM TYPE box beside the amount. Method 3: One-third of actual expenses Your car must have travelled more than 5,000 business kilometres in the income year (or, if you used the car for only part of the year it would have travelled more than 5,000 business kilometres had you used it for the whole year, see step 1 below). You claim one-third of all your car expenses, including private costs (but excluding capital costs, such as the purchase price, the principal on any money borrowed to buy your car and the cost of any improvements). For fuel and oil costs, you can keep receipts to work out the amounts or you can estimate them based on odometer records that show readings from the start and the end of the period you had the car during the year. You need written evidence for all the other expenses for the car as well as records that show the car's engine capacity, make, model and registration number. You may need to show how you worked out your business kilometres and any estimates you made. Step 1 If you owned or leased your car for the whole year, go to step 2. If you owned or leased the car for part of the year, you will need to work out whether you can use this method. Firstly, work out the number of kilometres travelled and multiply that

9 7 P a g e D E D U C T I O N S I N D I V I D U A L M O T O R V E H I C L E number by 365. Then divide this amount by the number of days you had the car during the year. If your answer is more than 5,000 km you can use this method. Step 2 Add up your total expenses for fuel and oil, registration, insurance, loan interest, repairs and maintenance, the decline in value or lease payments and any other costs of running your car. Work out the amount to show here for decline in value. Step 3 Divide the total expenses by 3. Step 4 Write the amount at A item D1. Print the code letter O in the CLAIM TYPE box beside the amount. Method 4: Logbook Your claim is based on the business use percentage of the expenses for the car. Expenses include running costs and decline in value but not capital costs, such as the purchase price of your car, the principal on any money borrowed to buy it and any improvement costs. If you need to work out the decline in value of your car, see Deductions for decline in value (depreciation). To work out your business use percentage, you need a logbook and the odometer readings for the logbook period (see below). You can claim fuel and oil costs based on either your actual receipts or you can estimate the expenses based on odometer records that show readings from the start and the end of the period you had the car during the year. You need written evidence for all other expenses for the car. Your business use percentage is the percentage of kilometres you travelled in the car for work during the year divided by the total kilometres travelled by the car during the year. If the pattern of your car use changed during the year, make a reasonable estimate of your business use percentage for the whole of , taking into account your logbook, odometer and other records, any variations in the pattern of use of your car and any changes in the number of cars you used in the course of earning your income.

10 8 P a g e D E D U C T I O N S I N D I V I D U A L M O T O R V E H I C L E Logbook period Your logbook is valid for five years. If this is the first year you are using this method, you must have kept a logbook during It must cover at least 12 continuous weeks. If you started using your car for work-related purposes less than 12 weeks before the end of the year, you can extend the 12-week period into (If you are using the logbook method for two or more cars, the logbook for each car must cover the same period.) If you established your business use percentage using a logbook from an earlier year, you need to keep that logbook and maintain odometer records. You also need to keep a logbook if we told you in writing to keep one. Your logbook must show: when the logbook period starts and ends, and the odometer readings at these times the total number of kilometres the car travelled during the logbook period the number of kilometres travelled for work during the logbook period based on the journeys recorded for the period the business use percentage for the period. Entries in the logbook for each business trip must be made at the end of the journey (or as soon as possible afterwards) and show the: date the journey began and ended odometer readings at the start and end of the journey kilometres travelled on the journey reason for the journey. Your records must also show the make, model, engine capacity and registration number of the car. Step 1 Work out the total kilometres travelled during the logbook period and how many of these were business kilometres. Divide the business kilometres by the total kilometres travelled. This is your business use percentage. Step 2

11 9 P a g e D E D U C T I O N S I N D I V I D U A L M O T O R V E H I C L E Add up your total expenses. (See Deductions for decline in value (depreciation) to work out the amount to include for decline in value.) Step 3 Multiply the amount at step 2 by your business use percentage from step 1 (or if the pattern of use of the car has changed then use the reasonable estimate you made). Step 4 Write the amount at A item D1. Print the code letter B in the CLAIM TYPE box beside the amount.