TAX DEDUCTIONS FOR VEHICLE EXPENSES
Do you use a vehicle for business? Or do you use your car in connection with your employment? What tax deductions can you claim for the use of this vehicle?
You are probably aware that new rules for the calculation of vehicle expenses came into force some years ago. There are now basically five methods for computing vehicle expenses. The tax-payer is entitled to compute his claim under as many methods as is legally allowed. He can then claim under the method which gives the highest deduction. At maximum, he can claim under four methods. At minimum, he is restricted to claiming under one method. The following matters are taken into account in determining how many methods are possible in any individual case. They are 1) type of vehicle, 2) use made of vehicle, 3) whether a log-book has been kept, 4) whether receipts have been kept, 4) whether total business kilometres for year exceeded 5,000 K.'s. As a general rule, the more records a tax-payer has kept, the more choices he has in computing his claim. He is thus more likely to pay less tax than someone who has kept fewer records. No distinction is made between self-employed and employees when applying the rules. We shall now examine each method in turn.
METHOD NO. 1
Method 1 applies when 1) the vehicle carries more than one tonne or more than nine passengers OR 2) the vehicle is a commercial vehicle and the only private travel is for travel between home and work. By a "commercial" vehicle, we mean a taxi, panel van or ute. It will be seen that Method 1 never applies to ordinary passenger cars. If Method 1 applies, then the other four methods do not apply.
To claim under Method 1, it is not necessary that a log-book be kept or that receipts be available. Entries in a Cash Book would be sufficient to substantiate expenses.
To take an example. John is a building subcontractor. He owns a ute and also a family car. He uses the ute for building contract work. He also travels to and from work each day in the ute. He uses the family car for shopping, holidays etc. He estimates private use travelling to and from work at 20% and remaining business use at 80%. He incurred the following expenses during the year which are shown on his cheque-book stubs.
|Repairs and servicing||900|
|Depreciation of vehicle at 22.5% =||2,000|
|TOTAL EXPENSES $||7,300|
John can claim 80% of $7300 which is $ 5840
It will be recalled that if Method 1 applies, then the other four methods do not apply. Consequently, if any of the other four methods are used, it means that either a) a passenger car is involved or b) a commercial vehicle is being used for private purposes such as shopping etc.
Method 2 applies when a log-book has been kept for a 12-week period and receipts have been kept for all expenses. Alternatively, petrol expenses may be substantiated by keeping the odometer readings at 30th June each year and calculating the petrol cost from the total kilometres travelled during the year. This method can be used irrespective of whether total business K's travelled during year exceed or are less than 5,000 K.
Assume that the vehicle expenses are the same as in Method 1 above. John's log-book shows 1) total K's travelled for year as 10,000 K and 2) business usage as 70%. Total business K's are 70% of 10,000 K's which is 7,000 K's. John has kept all receipts for expenses claimed.
John is entitled to claim 70% of $7,300 which is $5,110.
Method 3 applies when receipts have been kept but no log-book has been kept. Business K's travelled must exceed 5,000 K. A fixed proportion of 1/3rd of expenses is allowed.
Assume vehicle expenses the same as in Method 1. No log-book has been kept. From a diary, John estimates business K's for the year at 8,000 K. Receipts for expenses have been kept.
John is entitled to claim 1/3rd of $7,300 which is $2,433.
Method 4 takes 12% of the cost price of the vehicle. Business K's travelled must exceed 5,000 K. The only information required is the cost price of the vehicle. It does not require receipts for expenditure to have been kept. It does not require a log-book to have been kept.
John has kept no receipts. He has kept no log-book. He knows the cost price of his vehicle which he bought some years ago. It was $18,000. The vehicle did 6,000 K's on business.
John is entitled to a deduction of 12% of $18,000 which is $2,160.
Method 5 applies when the total business K's are less than 5,000 K's during the year. The tax-payer does not need to keep a log- book. However, he must be able to satisfy the Tax Office that he has done the business K's claimed. He might do this by keeping a diary. Alternatively, the Tax Office might accept a computation based on memory, compiled after the year end. An important point to note is that if the business K's exceed 5,000, the tax-payer can choose to base his claim on 5,000 K's. and ignore the excess over 5,000 K. A flat rate per K. is allowed by the Tax Office. The rates are as follows.
|Vehicle up to 1600 cc||42.2 cents per K|
|1601 cc to 2000 cc||51.2 ..|
|2001 c cto 3000 cc||53.9 ..|
|over 3000 cc||57.4 ..|
John uses his car to regularly do the weekly banking on behalf of his employer. After the year end, when he comes to do his Tax Return, he estimates business usage as 52 weeks X 10 K per trip which is 520 K's. His car is 1900 cc.
John is entitled to a deduction of 520 X 51.2 cents which is $266.
Let us take an example from real life. A client came to see me. In response to my questions, he provided the following information. He told that he owned only one vehicle, a station-wagon. He had used this vehicle for both business and private purposes during the year. The private use included weekend shopping etc. He was self-employed. He had not kept a log-book. He had kept receipts for all expenditure claimed. From a diary that he had kept, he estimated business k's for the year at 9,423. He had paid $18,000 for the vehicle some years ago. The vehicle was 2200 cc.
What methods apply?
Method 1 does not apply because he had used the vehicle for private purposes (not including travel to and from work).
Method 2 does not apply because he has not kept a log-book.
Method 3 applies because he has kept receipts.
Method 4 applies because he has a record of the purchase price.
At first glance, Method 5 would not appear to apply because the business K's are over 5,000. However, he can choose to ignore the excess above 5,000 and claim on 5,000 K.
The running costs of the vehicle were as follows.
|Depreciation at 22.5%||4,050|
|Fuel and oil||686|
|Registration and insurance||224|
|Repairs, servicing and tyres||740|
|TOTAL COSTS $||5,700|
I have written a computer program which embodies all the rules mentioned above. I fed in the raw data above and this is what the computer came out with.
Method 3. 1/3rd of $5,700 which is $1,900
Method 4. 12% of cost price of $18,000 which is $2,160.
Method 5. 5,000 K's at 53.9 cents per K which is $2,695.
The method which gives the highest deduction is obviously Method 5. A deduction of $2,695 was claimed in his Tax Return.
As a general rule, when total business K's for year are less than 5,000 K., it will be found that the set rate per K gives the best results. Even when business K's exceed 5,000 K, sometimes it will be found that the best result is obtained by claiming a set rate per K on 5,000 K, as in the above example. Method 3 will often give the best results where a tax-payer has just bought a new vehicle. The tax-payer stands the highest chance of obtaining the best deduction when he has kept 1) receipts for all expenses, 2) a log-book for at least a 12-week period and 3) odometer readings at the 30th June each year.
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