Motor vehicle expenses are among the most claimed — and most contested — deductions in the Australian tax system. The ATO allocates significant audit resources to vehicle claims because the rules are genuinely complex, the record-keeping requirements are specific, and the consequences of getting it wrong (from over-claiming the personal-use component) are material. For bookkeepers, understanding all four layers of the motor vehicle landscape — the two individual claim methods, fringe benefits tax on employer-provided cars, the luxury car depreciation limit, and fleet accounting for multi-vehicle operators — is essential for advising clients correctly.
The Two Individual Claim Methods
For individual taxpayers (sole traders, employees, partners in partnerships) claiming deductions for a car used for work purposes, the ATO recognises two methods under Division 28 of the Income Tax Assessment Act 1997 (ITAA 1997).
Cents per kilometre method: In 2025–26, the rate is 88 cents per kilometre. Claims are capped at 5,000 kilometres per vehicle per year, producing a maximum deduction of $4,400. No fuel receipts or running cost records are required, but the taxpayer must be able to substantiate the number of business kilometres with a contemporaneous record — diary entries, appointment calendars, or odometer logs. The method is unavailable to companies and trusts.
Logbook method: The taxpayer maintains a logbook over a minimum 12-consecutive-week representative period, recording the date, destination, purpose, start and end odometer readings, and kilometres for each journey. The resulting business-use percentage is applied to all running costs (fuel, oil, rego, insurance, repairs, interest on loans, and depreciation) for the full income year. The logbook is valid for five years provided the use pattern has not materially changed; annual odometer readings must still be recorded. For vehicles with predominantly business use, the logbook method almost always produces a significantly larger deduction than the cents per kilometre cap.
Entities (companies and trusts) cannot use the individual methods. They must claim actual vehicle running costs based on documented business use — typically supported by a fleet log or usage register.
Fringe Benefits Tax on Company Cars
When a business provides a car to an employee (including a director who is an employee) for their private use, the private use of that car is a car fringe benefit under the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986). FBT is levied on the employer, not the employee, at the FBT rate (currently 47%) on the taxable value of the benefit.
There are two FBT valuation methods for car fringe benefits:
Statutory formula method: The taxable value is calculated as:
- Base value of the car (typically original cost, including dealer delivery but excluding registration and CTP insurance) × statutory rate × days available for private use / 365
The statutory rate is 20% regardless of actual private use (the multiple-rate structure based on kilometres travelled was abolished in 2014). A car available for an employee's private use for the full year at a base value of $50,000 would have a taxable value of $10,000. FBT payable by the employer: $10,000 × 47% = $4,700.
Operating cost method: The taxable value is the total operating costs of the car multiplied by the percentage of private use. If the employee maintains a logbook and private use is 30%, the taxable value is 30% of all running costs (including notional depreciation). The operating cost method can produce a lower taxable value for employees who predominantly use the car for business.
The bookkeeping implications:
- FBT is an employer cost — it is deductible for income tax purposes (unlike most personal expenses) but is not a GST event (FBT is outside the GST system)
- FBT must be accrued quarterly if the employer is registered for FBT on a quarterly reporting basis, or recognised as an annual liability
- Employee contributions to the car's running costs reduce the FBT taxable value — track any employee contributions (petrol, insurance payments made by the employee) as they are relevant to the FBT calculation
- GST input tax credits are available on car running costs to the extent the car is used for business — a separate GST credit apportionment applies to the FBT calculation
The exempt minor benefit rule does not apply to car fringe benefits — there is no de minimis exemption for car availability. If a car is made available for private use, FBT applies.
The Luxury Car Depreciation Limit
For businesses purchasing expensive passenger vehicles, the luxury car limit (or cost limit) under section 40-230 of the ITAA 1997 caps the depreciable cost of a car. For 2025–26, the limit is $69,674. A business that purchases a $120,000 luxury sedan can only claim depreciation on $69,674 — the remaining $50,326 is a permanent non-deduction.
The limit applies to:
- The depreciation (decline in value) calculation
- The calculation of the residual value for purposes of the operating cost FBT method
- The base value for the statutory formula FBT method (limited to the cost limit for post-7 May 2006 acquisitions)
The luxury car limit does not affect the deductibility of running costs — fuel, insurance, and rego for a $120,000 car are deductible on the same basis as for a $30,000 car, subject to the business-use apportionment.
Separately, the luxury car tax (LCT) — levied at 33% on the portion of the car's value exceeding $80,567 (2025–26, or $57,581 for fuel-efficient vehicles) — is not recoverable as a GST credit and adds to the cost of the vehicle for the buyer. It is included in the purchase price and treated as part of the asset cost for depreciation purposes (subject to the $69,674 cost limit cap).
Fleet Management Accounting
Businesses operating a fleet of vehicles — trades businesses, delivery companies, transport operators, sales organisations — have more complex motor vehicle accounting requirements than sole traders.
Asset register: Each vehicle in the fleet is a separate depreciating asset. The register should capture: vehicle make, model, VIN, registration number, purchase date, purchase price (and dealer invoice), financing method (chattel mortgage, operating lease, or owned outright), and the depreciation method and rate applied.
Operating costs by vehicle: Where practical, code fuel, maintenance, insurance, and registration to individual vehicle cost codes. This enables fleet cost-per-kilometre analysis and identifies vehicles that are costing disproportionately relative to their utility.
Chattel mortgage accounting: For vehicles financed under a chattel mortgage (the most common fleet finance method in Australia), the full purchase price is treated as an asset acquisition in the period of purchase. GST on the purchase price is claimed as an input tax credit upfront (on the BAS for the period of purchase). The loan creates a liability on the balance sheet; repayments split between interest (tax-deductible, no GST) and principal (not a deduction, reduces the liability). Depreciation is claimed on the asset separately.
Operating lease vs finance lease: An operating lease creates no asset or liability on the balance sheet (under old standards); the lease payments are simply an operating expense. However, for entities that apply AASB 16 — Leases, virtually all leases must be recognised as right-of-use assets and lease liabilities. The distinction between operating and finance lease has been substantially removed for accounting purposes under AASB 16, though it remains relevant for tax purposes.
FBT fleet reporting: A fleet of 20 vehicles all available for employee private use creates 20 separate FBT calculations. Most fleet operators use the statutory formula method for simplicity, though for fleets where logbooks are maintained (enabling the operating cost method), the aggregate FBT saving can be material. Fleet management software that integrates logbook and odometer data with the FBT calculation is worth recommending to clients with more than 10 vehicles.
Summary
Motor vehicle bookkeeping covers a spectrum from the simple (a sole trader claiming cents per kilometre for visiting clients) to the genuinely complex (a company managing a 50-vehicle fleet across multiple FBT methods with chattel mortgage financing). The consistent thread is documentation — the ATO's ability to scrutinise and disallow vehicle claims relies on the absence of contemporaneous records. Building good record-keeping habits for motor vehicle clients protects their claims and minimises audit exposure.