Are car finance payments tax deductible?

Are Car Finance Payments Tax-Deductible?

Are car finance payments tax deductible? Motorfit Sydney assist in learning more about what is deductible come tax time.

Words by Motorfit

30 May 2022

As a leading used vehicle dealership in Sydney, Motorfit Sydney gets asked these questions a lot:

  • Are car finance payments tax-deductible?
  • Can you write off interest on a car loan?
  • Is auto loan interest tax-deductible?
  • How do I know what car loan expenses to deduct from my taxes?
  • The answers to these questions vary depending on your individual vehicle usage.

Understanding what expenses are tax-deductible is imperative in maximising savings on your taxes. Read on to learn the answer to “Is car loan interest tax-deductible?” and other related queries about vehicle tax deductions.

How to Determine If Car Finance Payments are Tax-Deductible In Australia.

Generally, you can only deduct car payments from your tax return if the use of your car is for business. As a result, you cannot benefit from any deductions for vehicles you use solely for personal reasons.

Additionally, you typically cannot deduct the entire car loan or lease payment from your taxes. Instead, you are only able to deduct the interest on your car payment as well as other related expenses.

However, there are a variety of business-related cases in which you could deduct car payment interest from your Australian taxes. Here are a number of usual instances in which this interest may be tax-deductible:

1. You Are a The Owner of a Business and Use Your Vehicle Solely for Business Purposes

The most straightforward instance in which you are able to deduct your car payment interest from your taxes is if you are a business owner who uses your vehicle explicitly for business purposes.

For example, you could own a contracting business and drive your work vehicle from job to job. At the end of the day, you park your work vehicle at your business, then drive your personal vehicle back home.

In this case, you could claim the car payment interest and all related expenses on your taxes.

2. You Are a Business Owner Who Provides Vehicles to Employees

If you own a business and offer work vehicles to employees, you can claim these vehicles on your taxes. However, you will need to state whether the employees use these vehicles solely for work purposes or if they also use them for personal reasons.

3. You use a Vehicle Partially for Business use and Partially for Private Use

If you finance a car that you use partially for business reasons and otherwise for personal use, you can claim part of the vehicle’s expenses on your taxes. However, you will be required to correctly identify the percentage of the total vehicle use that is business use.

Best practice in keeping track of the car’s business usage is to keep a diary or logbook of your activity with the vehicle. For example, you can track your mileage at the commencement of the workday and at the end of the workday to determine the distance in which you traveled for business use throughout that particular day.

NOTE: According to the Australian Government, traveling to and from from your place of business is considered private use. The only exception to this policy is if you work from home and travel to other places for work purposes.

What Car Expenses Can You Deduct From Your Taxes?

While you generally cannot deduct an entire auto payment from your Australian taxes, you can deduct various related expenses. Here are the business auto expenses the Australian Government enables you to deduct from taxes:

  • Depreciation (decline in value)
  • Interest on an auto loan
  • Fuel and oil
  • Lease payments
  • Insurance cover premiums
  • Registration

Calculating Motor Vehicle Expenses for Business

As we mentioned earlier, if you use your vehicle for personal and business use, you’ll be required to calculate your usage percentage for business purposes to figure out how much to deduct.

As a result, you’ll want to calculate the business motor vehicle expenses correctly. The Australian Government allows you to use a number of different methods to calculate these expenses:

Cents Per Kilometre Method:

This method utilises a set rate for each kilometre you travel for business reasons, with a maximum of 5,000 business kilometres per vehicle each year. You can review the current rate on the Australian Taxation Office website.

Logbook Method:

This method requires you to keep a logbook of your vehicle activity to assists in working out the percentage travelled for business reasons. In this method, you track your distance travelled for personal and business reasons, then divide the business use distance by the total distance. This percentage can assist you in determining the exact expenses to take away from your business taxes.

Actual Costs Method:

This method requires you to calculate the actual costs of your business vehicle expenses based on collected receipts. If you use your vehicle for shared use, you can utilise the logbook method to determine the percentage of these costs to deduct.

If you own a sole trader or partnership and are claiming a vehicle,  you can use the cents per kilometre or the logbook method. However, if you own a company or trust or are claiming a vehicle other than a car, you must utilise the actual costs method.

Other Tax Benefits for Car Loans

Over the course of the past few years, the Australian Government has begun offering $150,000 in tax rebates for small business owners who purchase vehicles for business use. Any business with a turnover of $500 million or less can deduct the cost of their business vehicles and other assets from their business taxes.

However, as with the other tax deductions we have previously made note of, you’ll be required to specify whether you use the vehicle solely for business use or also for personal use. If you use the car for personal reasons, you can only deduct the percentage of the car’s cost equal to your business usage.

Altogether, if you use your vehicle for business purposes, you can deduct a portion of its expenses from your taxes. The exact amount you can deduct is dependant on the amount of time that you use the vehicle for business purposes.

Now that you know these tax deduction guidelines, you can purchase your business vehicle with confidence. Contact Motorfit Sydney today to browse and purchase our wide range of quality used vehicles. Our expert team make the vehicle buying process smooth and easy. Have peace of mind purchasing your next vehicle with Motorfit Sydney’s expert team, call us today!

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