You can claim deductions for the use of motor vehicles (including motorcycles) when they’re used for business or work purposes. While your method of deduction will vary depending on your unique circumstances, regardless of how you claim, it’s important to distinguish the applicable work/business-related portion from any personal/private use, and stay on top of your record keeping.
There are three different ways to claim motor vehicle expenses, including:
- Cents per kilometre;
- Actual costs (only available to businesses); and
- Logbook method.
Cents per kilometre
This method is commonly used by individuals as it allows you to claim up to 5,000 kilometres per year per car without requiring written evidence of how you calculated your distance travelled. The catch here, however, is that the ATO may well ask you to provide detail on how you’ve arrived at your total and so it’s important to maintain diary or logbook records to help you substantiate your claim, should you need to.
Previously, the rate you could claim under this method was dependent on the type of car you were driving. Now, however, the ATO has a set rate per kilometre, which is $0.72 for the 2020/21 financial year.
Actual costs can usually only be claimed by companies and trusts, however, sole traders and partnerships can use this method when calculating deductions related to motorcycles or vehicles designed to carry nine people or more or loads of one tonne or more.
You can then deduct fuel and oil, maintenance and repair costs, tyres, insurance and registration, the interest portion of any loan used to purchase the vehicle, lease payments, signage/branding, add-ons like bull bars and roof racks and depreciation.
This method can only be used by sole traders or partnerships and only with reference to cars. If you haven’t kept a logbook before, you’ll need to maintain one for at least 12 straight weeks during the financial year and note not only your opening and closing odometre readings but also the associated expenses incurred in running your car. From there, you’ll be in a position to calculate your business versus private use percentage so that you can identify how much of all of your motor vehicle expenses are deductible.
Once you’ve kept records for 12 weeks, your logbook is then valid for up to five years provided your circumstances don’t change. (You can start a new logbook at any time, if they do.)
Choose the method that best suits you
If you are claiming car expenses for more than one car, you can use different methods for different cars. You can also switch between methods for different income years for the same car. It’s important to remember that your choice of method will be limited, however, based on the type of taxpayer you are and the type of motor vehicles you operate.
Regardless of how you claim your expenses, you must maintain your records in a legible format for a period of five years from the date of lodgement of your applicable tax return.
The ATO has put together an excellent fact sheet on motor vehicles expenses that you can download here (761 KB). You can also contact us at any time with any questions you may have specific to your situation.
Asked & Answered
“I’m considering purchasing a demo model bus with 19,000 km on the clock. Would this be classed as a new asset for the purposes of the accelerated depreciation rules?”
The accelerated depreciation rules can only apply to new assets. The rules basically ensure that the rules cannot apply if another entity held the asset when it was first used, or installed ready for use, other than as trading stock or for the purpose of reasonable testing or trialling. There is a limited exception to this for intangible assets if they have never previously been used for the purpose of producing assessable income.
While dealing with a different set of rules, in ATO ID 2009/101 the ATO concluded that a demonstrator vehicle had not been used for reasonable testing and trialling due to:
- The period it was used for demonstration purposes (almost 12 months);
- The number of kilometres travelled (10,500 kms);
- The decline in market value compared to the new price ($10,000 discount); and
- The balance of the warranty remaining (1 year out of 3 had been used up).
With respect to the “old” investment allowance, IT 2132 indicated that something could continue to be regarded as new where it was used for ordinary demonstration purposes for less than 3 months. If the asset has been used for more than 3 months it is unlikely to qualify unless the distance travelled is less than an ‘ordinary’ amount.
Given the bus has travelled 19,000 kms, it seems like it would be difficult to argue that it has only been used for reasonable testing and trialling based on the ATO guidance referred to above.
“We would like to gift a company car to an employee. Can you please advise whether this is possible and what is the tax implication? Thank you in advance for your help.”
If you decide to gift a company car to your employee as a result of their employment then a property fringe benefit would arise for Fringe Benefits Tax purposes. If the car was acquired by the company at arm’s length, the taxable value of the external property fringe benefit would be the cost to the company reduced by any post-tax employee contribution (refer to item 17.4 here).
A balancing adjustment event would be triggered when the company car is disposed of to the employee. The company would have an assessable balancing adjustment amount if the termination value is more than the written down value (WDV) on the date of disposal or a deductible balancing adjustment amount if the termination value is less than the WDV.
If the car is transferred to the employee for no cost, then the termination value would be the market value just before the employer gifted the car to the employee (refer to item 6 of subsection 40-300(2) ITAA 1997).
“I am getting a $15,000 car allowance a year. My employer has withheld tax on this allowance. Is that correct? I thought allowances should be paid out gross by employers and then included in my assessable income after which I can claim expenses related to the allowance?”
Allowances paid to employees are generally subject to PAYG withholding and your employer would generally need to remit the appropriate amount to the ATO (refer to section 12-35 Schedule 1 TAA 1953). However, there are some exceptions to this general rule.
It is possible to apply for a downward variation for PAYG withholding purposes when an employee receives a car or travel allowance but also expects to incur deductible expenses in relation to the use of the car or the travel they undertake. If the variation is accepted the employer only needs to withhold tax based on the difference between the allowance and the anticipated deductible expenses (if any).
In order to apply for the variation it is necessary to lodge a “PAYG income tax withholding variation application”. If the employee only wants to reduce the withholding rate applied to allowances, they should complete the short application.
The Commissioner has also provided a general approval for employers not to withhold from:
- Car allowances where the payments are calculated using the cents per kilometre rates for up to 5,000 business kilometres; or
- Travel allowances paid in respect of overnight travel if the allowance does not exceed the reasonable rates specified by the Commissioner.
Super Guarantee Payments
A reminder that Superannuation Guarantee payments for the quarter ended 31 December 2020 are due by the 28th of January 2021. Payments must be received by your employees’ funds by this date to be considered paid on time.
For cashflow purposes, you can make payments more regularly than quarterly (for example, fortnightly or monthly) as long as your total Superannuation Guarantee obligation for the quarter is received into your employees’ super funds by the relevant due date.
If you don’t make your Superannuation Guarantee payments on time and to the correct super funds, you must lodge a Superannuation Guarantee Charge statement and pay the Superannuation Guarantee Charge (SGC) to the ATO.
Unfortunately, the SGC is not tax deductible.
Are you disclosing your income and assets?
On the 27th of March 2014, the Commissioner of Taxation announced Project DO IT: an initiative within the ATO aimed at encouraging taxpayers to come forward and disclose unreported foreign income and assets. In 2019, the ATO again flagged that it was looking closely at foreign income, however, by then its penalty amnesty had expired.
How you are taxed and what you are taxed on depends on your residency status for tax purposes. As tax residency can be different to your general residency status it’s important to seek clarification. The residency tests don’t necessarily work according to ‘common sense.’ For tax purposes:
- Australian residents: taxed on worldwide income including money earned overseas (such as employment income, directors fees, consulting fees, income from investments, rental income, and gains from the sale of assets).
- Foreign residents: taxed on their Australian-sourced income and some capital gains. Unlike Australian resident taxpayers, non-resident taxpayers pay tax on every dollar of taxable income earned in Australia starting at 32.5% although lower rates can apply to some investment income like interest and dividends.
There is no tax-free threshold. Australian-sourced income might include Australian rental income and income for work performed in Australia.
- Temporary residents: generally, those who have come to work in Australia on a temporary visa and whose spouse is not a permanent resident or citizen of Australia. Temporary residents are taxed on Australian-sourced income but not on foreign-sourced income. In addition, gains from non-Australian property are excluded from capital gains tax.
Just because you work outside of Australia for a period of time does not mean you are not a resident for tax purposes during that same period. And, for those with international investments, it’s important to understand the tax status of earnings from those assets. Just because the asset might be located overseas does not mean they are safe from Australian tax law, even if the cash stays outside Australia. Don’t assume that just because your foreign income has already been taxed overseas or qualifies for an exemption overseas that it is not also taxable in Australia.
A lot of Australians have international dealings in one form or another and it’s not uncommon for taxpayers to forget to declare income from a foreign investment like a rental property or a business because they have had it for a long time and deal with it in the local jurisdiction with income earned ‘parked’ in that country. However, problems arise when the taxpayer wants to bring that income to Australia, and AUSTRAC or the ATO’s data matching systems pick up on the transaction. Then, the taxpayer will be contacted about the nature of the income and if the income is identifiable as taxable income (for example, from a property sale or income from a business), you can expect the ATO to look very closely at the details, with an assessment and potentially penalties and interest charges following not long after.
There is no point telling the ATO the money is a gift if it wasn’t. ATO staff can generally find the source of the transaction and will know it’s not from a very generous grandmother, for instance. Misdirection will only annoy them and ensure that there is no leniency.
What you need to declare in your tax return
If you are an Australian resident, you need to declare all worldwide income in your tax return unless a specific exemption applies (although in some cases even exempt income needs to be reported). Income is anything you earn from:
- employment (including consulting fees);
- pensions, annuities and Government payments;
- business, partnership or trust income;
- the sharing economy (Airbnb, Uber, AirTasker, etc.,);
- foreign income (pensions and annuities, business income, employment income and consulting fees, assets and investment income including offshore bank accounts, and capital gains on overseas assets);
- some prizes and awards (including any gains you made if you won a prize and then sold it for a gain); and
- some insurance or workers compensation payments (generally for loss of income).
You do not need to declare prizes such as Lotto or game show prizes provided that they are not paid to you in an income-stream fashion. “Windfall gains” and ad hoc gifts are tax free.
Do I need to declare money from family overseas?
A gift of money is generally not taxable but there are limits to what is considered a gift and what is income. If the ‘gift’ is from an entity (such as a distribution from a company or trust), if it is regular and supports your lifestyle, or is in exchange for your services, then the ATO may not consider this money to be a genuine gift.
I have overseas assets that I have not declared
Your only two choices are to do nothing (and be prepared to face the full weight of the law) or work with the ATO to make a voluntary disclosure. Disclosing undeclared assets and income will often significantly reduce penalties and interest charges, particularly where the oversight is a genuine mistake.
How to repatriate income or assets
Before moving funds out of an overseas account, company or trust it is important to ensure that you seek our advice on the implications in Australia and the other country involved. This is a complex area and the interaction between the tax laws of different countries requires careful consideration to avoid unexpected consequences.