Claiming Car Expenses As a Sole Trader
When you’re a sole trader who wants to purchase a car for business use, you'll need to consider whether you'll buy the car in your personal name or whether you'll buy it as a business asset using your ABN.
Unlike a limited company owner, there’s no concept of a “company car tax” for you, because there’s no legal difference between you and your business. This means that you will always own the vehicle. However, you can still claim tax benefits.
For the purposes of claiming car expenses on tax, a 'car' is a motor vehicle (not a motorcycle or similar) designed to carry a load of less than 1 tonne and fewer than nine passengers. It includes many 4WD vehicles.
Claiming Car Expenses When You Own the Car
If you are a sole trader using your own car for business purposes, you need to track the business use of your car to make a tax claim. There are two methods you can use, and if you have more than one business vehicle, you can use different methods for each vehicle. Choose the method that allows you to make the maximum claim.
Methods for calculating business vehicle tax deductions
1. Actual mileage
Using this method, you can claim up to 5,000 kilometres each year.
To make the claim on your sole trader 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 log 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.
Claiming Car Expenses When You Buy the Car Under Your ABN
When you purchase the car as a 'business vehicle' under the company name, you will claim 100% of the vehicle costs within the business.
The main advantage to purchasing the car under your ABN is that if you are registered for GST you can claim this back. Remember that you will have to pay GST when you sell the car on its sale price too.
If you use the business vehicle for personal use, you may need to pay Fringe Benefits Tax. Once again, there are two methods you can use to determine the proportion of personal use:
- Using the statutory formula, your Fringe Benefits Tax is 20 percent of the cost of the car.
- The 'operating cost' method gives you a better outcome if you use the car mostly in the business. The catch is that you'll have to complete a logbook, described above, to divide operating costs into those that can be claimed on the business.
Why It's Important to Get Sole Trader Tax Claims Right
When you're doing sole trader tax, it's really important that you claim only the business vehicle expenses that are tax deductible. Otherwise, your business may become liable for fringe benefits tax, as well as losing the claimed tax deduction.
Getting the Right Car Loan is the Best Way to Save
When taking out a business car loan as a sole trader, there's a lot to consider. Consult your accountant or finance professional about the most tax-efficient options for your specific business set up.
No matter which option you choose, getting the best possible car loan is the best way to save money within your business and your personal accounts. A car loan broker can make you aware of options that you might not otherwise come across and guide you in your selection of the best car loan for your specific needs.