Car Expense Tax Deductions - What You HAVE To Know for 2016 [free Template]

Did you know that Australian taxpayers claim around $8 billion dollars in work related car expenses each year?

That’s around 40% of all work-related deductions claimed.

With the government currently reviewing the way in which work-related car expense deductions are calculated, now is an opportune time to take a closer look at the changes and what the landscape for deducting car expenses is set to look like for the 2016 financial year.

There are currently 4 methods for individuals to claim a deduction for work-related car expenses.

  1. Logbook
  2. Cents per km
  3. 1/3 of actual expenses
  4. 12% of original value

If the government’s proposed changes go ahead, from the 2016 year onwards, we are set to lose the 1/3 of actual expenses and the 12% of original value methods, with some minor changes to the cents per km method.

  1. Logbook
  2. Cents per km
  3. 1/3 of actual expenses
  4. 12% of original value

LOGBOOK

If you use the logbook method, carry on doing what you’ve been doing. Nothing is going to change (congrats on your next level record-keeping skills by the way).

CENTS PER KM

If you use the cents per km method, the set rate of deduction is set to change to .66 cents per km for all vehicles.

If you have a Mazda 2, things won’t really change much for you.

Based on the current rules, you’re allowed to claim a deduction based on a set rate of .65 cents per km. Assuming that you’ve travelled 5,000 km or more (the maximum allowable under this method), your tax deduction is set to increase by the grand sum of $50 in 2016.

If you’re earning $60,000 per year that would translate to about $16.25 extra in your tax refund. Winning… (I suppose…).

If you have a V8 Commodore, the news is slightly bleaker.

Based on the current rules, you’re entitled to claim a deduction based on a set rate of .77 cents. Assuming you’ve travelled 5,000 km for business purposes during the year, your tax deduction is set to DECREASE by $550 in 2016.

If you’re on about $60,000 per year that would translate to about $179 less in your pocket come tax time. Losing. A little. (Not really sheep stations.).

If you use the 1/3 of actual expenses or the 12% of original value methods, please take note - from the 2016 financial year onwards, they are set to be removed altogether.

According to ATO statistics, only 2% of all taxpayers who claim car expense deductions utilise these methods. As shown in the graph below, the LOGBOOK and cents per km rate certainly do account for the lions share of the 8 billion dollars of work-related car expenses claimed across the four deduction methods.

SD composition of car expense deductions - all claims

What these statistics don’t acknowledge however, is the average deduction that was claimed by this 2% of taxpayers.

As illustrated by the graph below, the average deduction claimed by taxpayers using these methods has historically been about 2x to 3x the average deduction claimed by taxpayers under the cents per km method.

SD car expenses deducted - per claim

From a practical perspective, I can’t ever recall the 1/3 of actual expenses method resulting in the highest deduction for any of my clients.

Generally, you could access a similar sized deduction amount through one of the other three methods - without the additional burden of having to keep receipts for all car expenses, calculate depreciation and estimate petrol expenses.

It was just not worth the hassle.

On the other hand, the 12% of original value method often proved a great winner for many clients.

For those with cars that cost close to (or over) the luxury car limit ($57,466 for the 2015 financial year), it provided them with a healthy deduction of around $7,000 - without the hassle of maintaining a logbook. Depending on their marginal tax rate, this could mean close to $3,500 cash back in their pockets come tax time.

Not a bad result at all.

If the government’s proposed changes do go through, taxpayers who used to rely on the 12% of original method will now be faced with a choice in the 2016 year:

  • forgo up to $3,650 dollars in deductions (being the difference between the maximum deduction under the 12% of original value method of $7,000 and the maximum deduction under the revised cents per km method of $3,350); OR


  • start maintaining a logbook.

Sure, maintaining a logbook is more work than providing a ‘reasonable estimate’ (as required under the cents per km, 12% of original value & 1/3 actual expenses methods). But, unless you’re prepared to leave money on the table come tax time 2016, its time to roll up the sleeves for 12 weeks and prepare your logbook.

Here are my top five tips for maintaining a logbook – stress free.

  1. Take an odometer reading for your car at 1 July each year. Make it a habit.


  2. Your logbook only needs to be kept for 12 consecutive weeks - not the entire financial year. As long as this 12 week period is representative of the usual travel that you undertake throughout the year, it can be relied upon for 5 years.

    12 weeks of work for 5 years of higher deductions. Surely we could live with that.


  3. You only need to record one entry in your logbook for consecutive trips.

    For example, if you were a tradesperson making a number of house calls during the day, you would only need to make one logbook entry. That entry would simply have your odometer records at the beginning and end of the trip and a narration such as “Multiple house calls – Hawthorn area”.


  4. You only need to enter work-related journeys in your log book. Not every journey. The assumption here is that all journeys not recorded in the log book are private in nature.


  5. You don’t need to keep petrol receipts.

    Speaking for all accountants, bookkeepers and secretaries as well as the poor partners of such people - never give us a shoebox of petrol receipts at tax time. Seriously. Please. Don’t.<

    All that you have to do is find your vehicles fuel consumption rating HERE and the average price of petrol in your capital city HERE. A bit of simple math will provide an estimate of how much you would have spent on petrol for business trips during the year.

    (Business KM travelled / 100) Fuel consumption Average petrol price = Petrol expense.

    The tax office is happy to accept this approach and I strongly suggest members of the sansdesk community do so too.

CONCLUSION

The bottom line is that if you do use your car for work, claiming a deduction may get a lot simpler for the 2016 tax year. For better or worse? Well, that depends on who you are and what you drive.

If you used to use the cents per km rate, be wary of the change in the set rate for the 2016 year and remember you can still only deduct up to 5,000 km per year.

If you used the 12% of original value or 1/3 of actual expenses, it’s time to weigh up a) whether to start keeping a logbook or b) whether to accept a lower deduction under the cents per km method in the 2016 year.

If you were already using a logbook, you don’t need to do anything. Your existing logbook would still be valid, or you can begin a new 12 week logbook if the five year period for your existing logbook is up. The record-keeping requirements are exactly the same as before.

If you need to start keeping a logbook, you have a few options. You could purchase a paper logbook from your local stationary store or use one of the many software products and apps that are available (I recommend checking that the app is ATO approved before committing to using it):

Logbook Me

Logit

Travel Logs Vehicle Logbook

E-logbook

As a FREE bonus to the sansdesk community, you can download the LOGBOOK and CENTS PER KM template that we use within the sansdesk practice HERE.

These changes aren’t law yet, so head over to our Facebook page - we will be keeping the sansdesk community updated as the government review of car expense deductions progresses.

Edit: legislation enacting these changes to car expense deductions received royal assent on 30 November 2015 and are now law

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It is important to remember that everyones situation is different. The information contained in this post should not be relied upon as specific professional advice. Please contact us to obtain specific advice in relation to your particular situation.

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