Is Your Car Loan Tax Deductible?
f the car you purchase is for personal use, you can't deduct the interest you pay on a car loan from your tax return. However, for commercial car, vehicle and equipment loans, the interest is a tax deduction.
If you have a vehicle that's used partly for business and partly for personal use, the interest is deducted as the percentage that the car is used in your business.
Commercial Car Loan Is Tax-Deductible
When you take out car finance to purchase a vehicle for use in your business, the interest you pay on the loan is a business expense.
This means that you can claim a tax deduction based on the proportion that business use makes up the total use of the vehicle.
This calculation is easy if the vehicle is only used for business. It's much more common for a car to be used partly for personal use, and if this is the case, there are two methods you can use to determine the proportion of business use.
Methods for Calculating Business Use
There are two methods you can use to calculate your business vehicle tax deduction. You should choose the method that allows you to make the maximum claim.
1. Actual mileage
Using this method, you can claim up to 5,000 kilometres each year.
To make the claim on your tax return, you multiply the total number of business kilometres that you travel by the standard rate of 66 cents per kilometre. This calculation represents the depreciation and all other vehicle expenses.
You don't need to have written evidence for this method, but you do need to demonstrate that you have incurred the expenses that you claim. This means keeping diary records of particular journeys.
The logbook method requires you to track your expenses for 12 weeks. If you use this method, you need to repeat the logbook once every five years to determine if your business use of the vehicle has changed.
Here's how it works:
- You record each journey, including the start and finish times, start and end odometer reading, total kilometres travelled and the business reason for the trip.
- Your logbook will also need to have a start and end date for the long period, the odometer reading at the beginning and end of the log period, total kilometres driven during this time.
- With all of this information, you can calculate the business use percentage for the logbook period.
Once you have completed the logbook, you can claim all operating expenses for the vehicle, including servicing, repairs, parts, depreciation, insurance and car loan interest. You must keep receipts for all of the items that you want to claim.
Depreciation is calculated as 25 per cent of the recorded value of the vehicle each year.
Which journeys aren't 'business use'?
There's sometimes confusion about when you're taking a business journey and when you are driving for personal use. To be clear:
- Driving from home to work is always personal use, even if you do errands on the way to work.
- Additional trips to work for out of hours meetings are still personal use.
- If public transport isn't available, your trip to work is still for personal use.
What other claims can I make?
1. Chattel Mortgage for GST
Provided that you use a car more than 50 per cent of the time for business use, you can use a chattel mortgage to purchase your business vehicle.
A chattel mortgage allows you to claim the GST included in the vehicle purchase price.
2. Instant asset write-off
Until 30 June 2018, you can also claim the 'instant asset write-off' for purchases under $20,000 if your business meets the criteria. This means that you'll claim depreciation on the item in a lump sum in your first business tax return, rather than gradually over the life of the asset.
3. Novated leasing
If you're an employer, you may provide benefits to your employees by giving them an option to purchase a car with salary sacrifice. This reduces the income tax that your employer will pay, without affecting your payroll expenses.
Get the right car loan to pay less interest
Using a car loan broker to advise you on your options may mean you discover a car loan option you didn't know about, that works out much cheaper. A broker can help you to compare over 15 different lenders and choose the car loan option that will put your business ahead.
No matter which option you choose to purchase a business vehicle, the best way to reduce your interest costs is to get the right car loan for your specific financial profile and use case. Call us on 1300 722 210 or apply for a Loan Pre-Approval.