New rules when paying car allowances
Last year's changes to tax law have made claiming car expense tax deductions for individuals much simpler.
Before July 1, 2015, there were four methods available to employees for claiming car expenses:
- cents per kilometre (capped at 5000 business kilometres)
- logbook (unlimited kilometres)
- 12 per cent of original value
- one-third of actual expenses
Now, the cents per kilometre and logbook methods are the only two available to use.
Cents per kilometre method
The cents per kilometre method was changed to use a standard rate of 66 cents per kilometre, irrespective of the car engine's size for the 2015-16 income year. These rates were previously based on a car's engine size and whether the car had a rotary or non-rotary engine.
The ATO set the PAYG (Pay-As-You-Go) withholding rate for cents per kilometre car allowances at 66 cents per kilometre from July 1, 2015. Failing to withhold any amount over 66 cents for all future payments of a car allowance may result in an employee having a tax liability when they lodge their tax return.
The ATO has also stated that employers who have already paid employees a car allowance at a higher rate should discuss with the employees if they want the employer to increase the withholding amount for the rest of the financial year to make up for the shortfall.
Under the logbook method, claims are based on the business-use percentage of the expenses for the car, such as running costs and decline in value. Capital costs like the car's purchase price and improvement costs are not included.
To determine the business-use percentage, taxpayers need a logbook and odometer readings for the logbook period (which is a minimum, continuous 12 week period).