There are various ways you can reduce your tax burden if you’re the owner of a vehicle used for work. You can claim vehicle expenses at the end of the financial year, you can claim part or all of the vehicle purchase at the same time, or you can reduce your effective taxable income by salary sacrifice to pay a novated lease.
Then there’s the instant asset write-off scheme which allows you to claim depreciation in full within the same financial year that you purchased your vehicle – rather than waiting around for the next financial year.
Even if you’re not an ABN holder, but do drive between different locations in pursuance of your job, you are entitled to claim a tax concession for that. The Australian Taxation Office (ATO) explains it in full detail on its website.
You’re eligible to claim motor vehicle expenses if you’re travelling between two different work locations, as you would if you’re a sales rep on the road visiting different customers, or you clean houses for a living and drive directly from one client’s home to another. Your expenses are also claimable if you drive from one employer’s place of work to another employer’s business location, which might be the case if you assist during the morning rush behind the counter of a milk bar and then drive to a local cafe for a mid-morning and lunch shift.
You are not entitled, however, to claim expenses for travelling by car between work and home.
The ATO asks you to use either of two calculating methods to track your expenses for claiming car expenses on your tax return. There’s the logbook method, which demands the driver keep track of distances travelled for work purposes (observed from the car’s odometer, over a 12-week period at least).
As of July 2020, the other method is to calculate your claim based on 72 cents per kilometre travelled, which is often a more appropriate choice for vehicle owners who aren’t necessarily using their car for work purposes all the time.
If you can claim your car’s finance repayments for work, having your employer deduct those payments from your gross pay (before tax), is a great way to reduce your taxable income. This type of loan arrangement is known as a novated lease.
The instant asset write-off scheme and claiming depreciation
In the past, a business purchasing a motor vehicle specifically as a workhorse would claim the vehicle’s depreciation at the rate of 15 per cent of the vehicle’s value in the first year, followed by 30 per cent depreciation in subsequent years.
The introduction of the Instant Asset Write Off scheme (IAWO) and its most recent upgrade has made the old way of depreciating an asset to reduce your tax burden more or less redundant.
As of October 6, 2020, IAWO applies to any asset, costing any amount of money and purchased by a business earning up to $5 billion a year. If your business has an ABN, the government is essentially asking you to go hog-wild, buying assets – which naturally include motor vehicles – for work-related purposes and immediately claim the asset’s depreciation during the same financial year.
The government is only guaranteeing the IAWO in its current form will carry through to June 2022, but if the economy is slow to pick up in the meantime, that end date may be extended again. So if your business has long-range plans to buy one or more work vehicles, there’s plenty of time to take advantage.
But do make sure you seek advice from as professional tax expert before cutting loose on a new purchase.