The complexity associated with the selection of a motor vehicle expense method is now slightly lessened due to changes proposed, and subsequently passed, in the Government’s 2015-2016 Federal Budget.
In previous income tax years, there were four methods one could choose from. However, for the 2015-2016 tax period and all following periods, the one-third actual expense method and 12% of original value method have been abolished. For the 2015-2016 tax year and beyond, the Cents per Kilometre Method, now simplified, and the Logbook Method are the only options available to choose from.
Cents per kilometre method: Previously, there were separate rates based on engine size; however, for the 2015-16 Income year, the rate has been standardised to 66 cents per kilometre for all motor vehicles regardless of engine capacity. This may change for future income years per the Commissioner of Taxation’s determination.
Unlike the Logbook method, which is outlined below, written evidence is not required to apply this deduction in your income tax return, but, should the ATO require it, you may be asked to substantiate how you worked out your business kilometres.
Therefore, while the evidence required on your part may be minimal, the maximum deduction you can claim is limited to $3300 (5000*0.66) per car, provided you can justify, without any written evidence, driving 5000 business kilometres.
However, if in the genuine utilisation of your motor vehicle for income producing purposes you incur expenses beyond $3300, this method would not accurately account for such incurrence, and, therefore, your end of year motor vehicle deduction would not reflect the actuality of your motor vehicle expenses.
Enter, the Logbook Method:
- This method is based on first establishing your business-use percentage, and then applying that percentage to certain expenses associated with the car. These expenses include:
- Running costs, such as fuel and oil ($1700)
- Depreciation ($6000)
- Registration and insurance ($2500)
- Repairs ($1200)
- Total: $11,400
Assuming a business-use percentage of 45%, your motor vehicle deduction for the costs incurred above per the logbook method would be $5130. Provided your business-use percentage is greater, the benefit of the logbook method would only increase relative to Cents per Kilometre Method and thereby provide you with a greater tax deduction.
Unfortunately, applying this method is not as simple as the mere Cents per Kilometre calculation. If this is the first year you attempt to use the logbook method, you will be required to keep a logbook during the income tax year for at least 12 continuous weeks which accurately represents how the vehicle is used for work related travel during the income tax year.
The logbook must contain information such as:
- Logbook period beginning and end dates.
- Odometer readings at beginning and end of above period.
- Total number of kilometres traveled during logbook period.
- Accounting for each journey recorded in the logbook, including:
- Start and finish times of the journey
- Odometer readings at the start time of the journey
- Kilometres travelled
- Reason for the journey
All of this will determine the split between private and business use of your motor vehicle and establish the business-use percentage used to apportion your incurred motor vehicle expenses into valid income tax deductions.
As evident above, there are more stringent and time consuming requirements associated with the Logbook Method by way of documenting all of the above, but, once you validly establish your logbook, it will remain valid for 5 years.
The effort required to document all of the above can also be mitigated by utilising one of the numerous ATO compliant logbook applications for smart phones and save yourself time and energy. These apps provide greater convenience as opposed to traditional pen and paper logbooks and greater organisation, structure, reliability and simplicity.
Logit: ATO compliant logbook app; makes use of your smartphone’s GPS to log business journeys and automatically calculate kilometres travelled. Can also be used manually as an alternative to a traditional paper logbook.
LogbookMe: ATO compliant logbook app; comes with a GPS enabled device that plugs into your car’s OBD-II port to send the relevant data from your vehicle to your LogbookMe account in real time. All that is needed on your part is sort through the trips and input which trips are personal and which are for business.
But, if you are technologically averse, a simple notepad or readymade physical logbook can be purchased as opposed to using the above smart phone apps.
Regardless of your chosen logbook method, if you use a motor vehicle significantly for work related purposes and incur numerous expenses in this usage, the logbook method should be the ideal choice to ensure maximum deductibility with regard to motor vehicle expenses in your income tax return.
This blog has been prepared for the purposes of general information and guidance only. It should not be used for specific advice or used for formulating decisions under any circumstances. If you would like specific advice about your own personal circumstances, please feel free to contact us on 02 9411 5422. We can help make sure the right method is used to give you the maximum possible tax deduction associated with any of these methods.