Car expense tax deductions for the self-employed

UPDATED AUG 4, 2020 • 6 MIN READ

In this article, we'll go through the rules surrounding car expense tax deductions for self-employed in Australia, and explain how to calculate and keep track of tax-deductible mileage and related car expenses as a self-employed person.

If you're an employee and you're looking for a how-to on mileage reimbursement or an employer wanting to know the rules for reimbursing your employees, you can instead check out our respective guides for employees and employers. If you happen to be both self-employed and an employee, you must keep separate records for each activity. In that case, we suggest you read both guides.

As a self-employed business owner, you can deduct car expenses accrued while doing business. If you use a car solely for business, you can deduct all the expenses related to operating the car. 

However, if you use the car for both personal and business travel, you can only deduct the cost of the business use. We'll get to how you can keep track of that later.

Before we get into the details, there are a few things you should be aware of: 

  1. If you don't read the specifics, you risk losing out on deductions or possibly burdening yourself with tedious work you'd rather not do. 
  2. Keep in mind that we are not tax specialists or the ATO, so be sure to check out the sources provided. We're just trying to help by providing an overview of self-employed mileage deductions. 

Three ways to calculate your mileage deductions

In Australia, there are three methods of calculating your mileage claim for tax deduction purposes:

  1. The cents per kilometre method
  2. The logbook method
  3. The actual costs method

The Cents per Kilometre method

The simplest way to calculate your work-related car expense deduction, the cents per kilometre method allows you to claim a deduction per business kilometre driven. The ATO sets the rate for each financial year, starting in July. The 2020/2021 cents per km rate is $0.72 per km, up to a maximum of 5000km for the financial year.

The logbook method

The logbook method allows you to calculate your work-related car expense deductions by keeping track of your mileage and total car expenses in a logbook, whether that is a paper book or an app.

To work out the amount you can claim with this method, you must:

  • Keep a logbook.
  • Work out your business-use percentage by dividing the distance travelled for business by the total distance travelled then multiplying by 100.
  • Add up your total car expenses for the income year.
  • Multiply your total car expenses by your business-use percentage.

Unlike the cents per km method, there is no kilometre limit when calculating your expenses using the logbook method.

The actual expense method

The actual costs method of calculating your deduction is based on all receipts for all business-related motor vehicle expenses, as well as a depreciation calculation.

You can only claim the percentage of the actual costs that relate to business use of the vehicle. Therefore, if a vehicle is used for both business and private purposes, you must keep records that allow you to work out the business-use percentage.

Which method do I have to use to calculate my mileage deduction?

  • If you are claiming mileage as an individual (eg in your personal tax return), you can use either the cents per km method or the logbook method.
  • If your business is classed as a sole trader or partnership, you have the following options:
    • If claiming for a car, you can use either the cents per km method or the logbook method
    • If claiming for an “other vehicle” (eg a motorcycle, a vehicle designed to carry a load more than one tonne, or a vehicle designed to carry nine or more passengers), you must use the actual costs method to calculate your deduction.
  • If your business is classed as a company or trust, you must use the actual costs method. This applies no matter which type of vehicle you have used.

What is the best way to track my expenses?

The records you need to keep depend on the method of calculation that you use. The cents per km method needs the simplest records, while the actual costs method requires the most detail, with a logbook somewhere in between. 

For the full breakdown of requirements, you can see our guide to car expense tax deductions, but the common thread for all methods of calculating your deduction are fairly straightforward. You will need to record your:

  • Total distance driven for the year
  • Breakdown of business vs personal use
    • for the cents per km method, this can be an estimation supported by diaries, a logbook, or similar.
    • For the logbook or actual costs method, this must be an accurate recording of business use vs personal use.

To give as accurate a result as possible, we recommend keeping “timely” records - in other words, records taken at (or as close as possible to) the time of the trip or expense. Weekly diaries, logs, trip sheets, account books, or similar records are generally considered “timely”.

In addition, you need to be able to show the business vs. personal use of your vehicle as a percentage. That means keeping a trip log and then calculating the share used for business. See how to do the calculation in the section below.

In today's digital world, you can take advantage of a mileage tracking app to save a lot of time. Driversnote and other similar apps not only log your miles for you but also store and generate adequate records whenever you need them.

What is the current ATO cents per km rate for the self-employed?

For the 2020/2021 financial year, self-employed individuals can deduct 72 cents per business kilometre.

This rate is an increase of 4 cents per kilometre from the previous rate. We’ve put together a table showing all the historic cents per km rates here for your convenience. 

How to calculate your deduction and business usage share

Knowing the portion of a car's business use will help you figure out how much you can claim for depreciation and other costs of operating that vehicle. Let's go through a quick example: 

You've driven ten “personal” trips, each of which was 20 km. That totals 200 personal km (10*20 = 200).

During the same period, you've also driven three business trips that totaled 100 business km. 

To figure out your business use, divide your business kilometres by the total number of kilometres driven. In our example, you've used your car for business 33% of the time (100/300 = 0.33). 

Calculating your total deduction based on the ATO cents per km rate is simple: Multiply the number of business km with the cents per km rate, $0.68.

Every one hundred business km equals $68 in the 2019/2020 financial year (100*0.68), with a maximum of deduction of $3,400 due to the 5,000km limit for deductions using the cents per km method.

Which types of business transportation qualify for a deduction?

Using the logbook or actual cost methods, there's no upper limit to how many km you can claim a deduction for, as long as you drive them for business. There are a few more things to consider though, and we've compiled a brief list. 

Types of transportation that are considered business:

  • Travelling between two different places of work
  • Meeting clients and going on customer visits
  • Running errands for business

Types of transportation that are NOT considered business:

  • Commuting from your home to your place of work
  • Carrying tools does not necessarily make a commute a business trip
  • Displaying advertising on a car does not make driving it a business trip

For more specifics, including cases in which you have no place of work, where your home qualifies as your place of work, carpooling, and more, check out the ATO's own publication on work-related car expenses.

Which cars or vehicles can I use?

The standard mileage rate covers the use of a car - specifically, a vehicle that is designed to carry:

  • a load of less than one tonne; and

  • fewer than nine passengers; and

  • is not a motorcycle.

If your vehicle meets one or more of the above conditions, you can claim a work-related vehicle expense using the actual costs method. 

One last question - how long do I need to keep any records for?

That’s a great question! The ATO requires that you keep records for any deductions that you are claiming for five years from the date you submit your tax return. Basically, this is to ensure that if they ask you to provide evidence to back up your claims, you will have that information ready and available for them. 

That's it for our guide on the basics of deducting mileage for self-employed in Australia. We hope we've been of assistance :)

Happy tracking! 


Related articles

 


This material has been prepared for general informational purposes only, and should not be taken as professional advice from Driversnote. You should consider seeking independent legal, taxation, or financial advice from a professional to check how this information relates to your own circumstances. Relevant laws also change from time to time.