Cents Per Kilometre Explained

Using your own motor vehicle for work can unlock serious tax deductions. In 2023–24, 3.6 million Australians claimed around $10.3 billion in work-related car expenses, which is one of the largest deduction categories claimed each financial year. But the Australian Taxation Office (ATO) has warned about over-claiming private trips in work-related travel. By mastering the Cents Per Kilometre method, you’ll both maximise your refund and minimise any audit risks.

Did you know? A typical sole trader claims roughly $3,000 in total tax deductions, with car expense deductions often making up a big slice.

In this blog, we’ll cover what counts as a work-related car expense (and what doesn’t), define eligible costs (from running expenses to depreciation), and explain in detail how the cents-per-kilometre deduction method works – including the Australian Taxation Office (ATO)’s rate for 2024 and the expected rate for 2025.

We’ll also compare the cents-per-km method to the alternative logbook method, discuss how ATO guidelines affect your deductions, and offer record-keeping tips to ensure you stay compliant. By the end, you’ll have clear, actionable tax tips to help you drive your tax savings further.

Why Understanding Car Deductions Is Important

Car expenses are a common and significant deduction for millions of Australians. On average, taxpayers who claim work-related expenses claim about $3,000 in total deductions, and car-related travel often makes up a large portion of that. Properly claiming your car use can substantially reduce your taxable income (and therefore the tax you owe).

For example, if you’re in a 32.5% tax bracket, a $3,000 car expense deduction could save you nearly $1,000 in tax – a meaningful amount for any individual or small business owner.

It is also equally important to understand the rules that helps you avoid pitfalls. The ATO has specific guidelines on what is allowed, and it actively monitors car expense claims. In recent years, the ATO has warned taxpayers to stop claiming private use as work-related and not to “double dip” deductions. Over-claiming or claiming non-eligible car expenses can lead to ATO scrutiny, audits, or denied deductions.

By learning the correct methods now, you’ll ensure you get every dollar you’re entitled to and stay on the right side of the tax law. In short, knowledge of car deductions is power – it means more savings and less stress at tax time.

What Counts as Work-Related Car Expenses?

You may only claim travel directly linked to earning income tax-assessable income. Examples include:

• Client visits or on-site consultations in your vehicle.
• Driving between two work locations (business kilometres).
• Business errands like supply runs.

Not deductible: Ordinary home-to-work commuting (unless you carry bulky tools).

What are Work-Related Car Expenses and Eligible Costs?

Work-related car expenses are the costs you incur when using your own vehicle to earn income, whether driving to meet a client, travelling between two job sites, attending a conference or running business errands. To qualify:

• You must own or lease the car personally (company-owned vehicles and reimbursed costs are excluded).
• The travel must directly relate to your work (normal home-to-work commuting is not deductible, unless you carry bulky tools or your home is your base of operations).

Eligible Costs

1. Running Costs
   • Fuel and oil
   • Servicing and repairs
   • Tyres, registration and insurance
2. Depreciation
   • The decline in your car’s value over time
   • Claimed proportionally to your business use

Under the logbook method, you add up all actual running costs and depreciation, then apply your business-use percentage.

Under the cents per kilometre method, the ATO’s flat rate (85¢ or 88¢ per km) already factors in those costs for an “average” car, so you multiply your work kilometres by the rate.

Ineligible Costs

• Private travel (including ordinary commuting)
• Traffic fines or parking tickets
• Capital cost of purchasing the car or non-business improvements
• Reimbursed expenses (unless you receive a taxable car allowance)

Note: You can still claim work-related parking fees and tolls separately even if you use the cents-per-kilometre method because they sit outside the flat-rate allowance.

By understanding which work-related car expenses you can and cannot claim, you’ll ensure your tax deductions are both maximised and fully compliant with ATO rules.

Running Costs vs. Depreciation: What’s the Difference?

When you claim car expenses, you’re really dealing with two separate cost types, running costs and depreciation, and the ATO treats each differently. Understanding both helps you choose the best deduction method.

1. Running Costs

These are the day-to-day cash outlays to keep your car on the road:

• Fuel & oil
• Servicing & repairs
• Tyres, registration & insurance
• Loan interest or lease payments

Under the logbook method, you add up all these actual costs for the year and then apply your business-use percentage. Running costs rise and fall with the number of kilometres driven; drive more, pay more.

2. Depreciation

Depreciation (or “decline in value”) is a non-cash expense reflecting your car’s wear and tear over time. Key points:

• You claim a portion based on business use.
• Calculated via ATO formulas (diminishing value or prime cost).
• Subject to a car cost limit (around $60–65k).
• Doesn’t include modifications or upgrades.

Why It Matters

• Cents-Per-Kilometre Method bundles both running costs and depreciation into a flat rate (e.g. 85¢ or 88¢/km).
• Logbook Method lets you claim each running cost and depreciation separately, which can be more generous if your actual costs exceed the ATO’s average.

Tip: If you have high upkeep costs or drive lots of business kilometres, run the numbers both ways- the logbook method may deliver a bigger deduction, while cents-per-km offers simplicity.

The Cents Per Kilometre Method Explained

The cents per kilometre method is a simple way to calculate your work-related car expense deduction. As the name suggests, you claim a fixed amount of money for each kilometre you drive for work. The ATO sets a standard rate per kilometre each year, and that rate is meant to cover all the typical costs of owning and operating a car (fuel, servicing, insurance, registration, depreciation, etc.).

You don’t need to keep receipts for individual expenses with this method – you simply keep track of how many kilometres you drive for work, and then you multiply your work kilometres by the rate to determine your deduction.

Under the Cents Per Kilometre method, you claim a fixed rate for each work-related kilometre you drive, no receipts needed for individual running costs or depreciation. Here’s how it works:

1. Track Your Work Kilometres
   • Record every trip you make “in the course of earning your income” (client visits, between sites, business errands).
   • Commuting from home to your regular workplace is not claimable.
2. Apply the ATO Rate
   • 2023–24 (FY): 85 ¢/km
   • 2024–25 (FY): 88 ¢/km (and expected to remain for 2025–26)
     Multiply your total work kilometres by the appropriate rate.
3. Observe the 5,000 km Cap
   • Maximum of 5,000 km per car, per financial year.
   • Joint owners or multiple cars each have their own 5,000 km limit, just don’t double-claim the same trip.
4. Calculate Your Deduction
   • Work km × Rate = Deductible Amount 
   •  e.g. 4,500 km × $0.88 = $3,960 
5. Enjoy Simplicity
   • No need for fuel or repair receipts.
   • The rate already covers running costs, depreciation, insurance, and registration.
   • Claim parking and tolls separately if they were work-related.

Tip: If you consistently exceed 5,000 km or have high actual costs, compare this method against the logbook method to see which yields the larger deduction.

Cents Per Kilometre vs. Logbook Method: A Comparison

When claiming motor vehicle expenses, individual taxpayers and sole traders choose between two ATO-approved methods:

Key Points

• You can switch methods year-to-year or between vehicles, but not both for the same car in one tax year.
• Avoid “double dipping”: if you use cents-per-km, you cannot claim individual fuel, servicing or depreciation again.
• Choose the method that delivers the largest deduction and matches your record-keeping capacity.

By comparing your actual expenses against the flat-rate allowance, you’ll know exactly which approach maximises your claim, whether you value convenience or want to capture every dollar of cost.

How ATO Guidelines Affect Your Deductions

Your car expense claims must follow the Australian Taxation Office’s rules; otherwise, you risk being denied deductions or an audit. Here’s what you need to know:

1. Only Claim What You Pay
   • You must bear the cost yourself (no reimbursed expenses).
   • Any employer car allowance is income; declare it, then deduct your actual costs against it.
2. Apportion Business vs Private Use
   • Under cents-per-km, count only your work kilometres.
   • Under the logbook, apply your documented business-use percentage.
   • Ordinary home-to-work commuting is private and not claimable.
3. Vehicle Ownership & Eligibility
   • You must own or lease the car, which must weigh under 1 tonne and seat fewer than nine.
   • Employer-owned or novated-lease cars generally require the actual costs method, not cents-per-km or logbook.
4. No “Double Dipping”
   • If you use cents-per-km, you cannot also claim fuel, servicing or depreciation separately.
   • One trip = one deduction. Pick your method and stick to it for each vehicle each year.
5. Keep Sufficient Records
   • Cents-per-km: diary, app or odometer readings.
   • Logbook: 12-week logbook + receipts + odometer start/end.
   • Retain records for at least five years.
6. Beware ATO Focus
   • High volume or repeated “flat-liner” claims (exactly 5,000 km each year) can trigger reviews.
   • Be ready to explain how you arrived at your figures with clear, consistent evidence.

By following these guidelines, claiming only genuine work travel, apportioning correctly, and keeping solid records, you’ll ensure your tax deductions are maximised and fully compliant.

Record-Keeping and Compliance Tips

Good records are the backbone of a stress-free car expense claim. Whether you choose cents-per-km or logbook, follow these tips:

1. Log Your Trips
   • Cents-per-km: Keep a simple diary, spreadsheet or mileage-tracking app. Note the date, purpose and kilometres for every work trip.
   • Logbook: Complete a 12-week logbook with date, start/end odometer, kms and trip reason. Use that business-use percentage all year.
2. Save Your Receipts (Logbook Only)
   • Store invoices for fuel, servicing, insurance, registration, parking and tolls.
   • Photograph or scan receipts to avoid faded originals.
   • Keep documents for any lease interest or EV-charging costs.
3. Retain Records for Five Years
   • The ATO can audit returns up to five years later.
   • Digitally back up your logbooks, diaries and receipts.
4. Be Honest with Your Totals
   • Don’t automatically claim the 5,000 km cap only for what you actually drove.
   • If you did hit 5,000 km, have diary notes or calendar entries to explain how you arrived at that figure.
5. Separate Work from Private
   • Clearly mark personal trips “private” in your log or app.
   • Only include journeys directly related to earning income.
6. Use Technology
   • The ATO’s myDeductions app and GPS mileage trackers can automate logging.
   • Export reports at year-end to support your claim.
7. When in Doubt, 
   • Consult the ATO’s online guides or a registered tax agent.
   • Better to verify a trip’s eligibility than risk an incorrect claim.

By staying organised and truthful, you’ll capture every legitimate deduction, satisfy ATO requirements and enjoy greater peace of mind come lodgment time.

Summary and Key Tax Tips

Navigating motor vehicle expenses can feel daunting, but with the right approach, you’ll confidently maximise your tax deductions. Here’s your quick-reference guide:

1. Know Your Eligible Trips

• Only claim work-related car expenses for client visits, travel between jobs or business errands.
• Ordinary commuting to your regular workplace is not deductible.

2. Choose the Right Method

• Cents Per Kilometre Method (85¢/km for 2023–24; 88¢/km for 2024–25): Best if you drive ≤ 5,000 km for work and want minimal paperwork.
• Logbook Method: Ideal for heavy users or expensive vehicles, no km cap, but requires a 12-week logbook and full receipt-based records.

Tip: Calculate both methods to see which yields the larger deduction before you lodge your tax return.

3. Stay Within the Rules (No “Double Dipping”)

• If you use cents-per-km, don’t also claim individual fuel, servicing or depreciation costs.
• If you use a logbook, claim only your documented business-use percentage of actual expenses.

4. Keep Solid Records

• Cents-per-km: Maintain a diary or app log of your number of kilometres.
• Logbook: Record date, start/end odometer readings, kms and trip purpose over 12 continuous weeks.
• Store all receipts (fuel, servicing, tolls, parking) and retain records for at least five years.

5. Mind the 5,000 km Cap

• Under cents-per-km, you can claim up to 5,000 km per vehicle each financial year no more.
• If your business kilometres exceed 5,000 km, switch to the logbook method to capture all your costs.

6. Claim Parking & Tolls Separately

• Work-related parking fees and tolls are deductible in addition to your chosen km rate or logbook claim.

7. Declare Any Car Allowance

• Include any employer car allowance as income, then deduct your actual car costs to offset it, ensuring you’re not taxed on money spent driving for work.

8. Review Annually & Seek Advice

• The ATO’s cents per kilometre rate may change each year; check before you lodge.
• For complex scenarios (EV charging, multiple cars, novated leases), consult a registered tax agent or use the ATO’s online Work-related car expenses calculator.

By following these tips and choosing the right method for your business kilometres, you’ll maximise your cents per kilometre or logbook deduction while staying fully compliant. Safe driving and happy claiming!

How Lodge Pro Helps You Claim Car Expenses

Lodge Pro streamlines every step of your motor vehicle expense claim:

1. Automatic Trip Classification
   AI tags fuel, servicing, tolls and parking transactions under “Car Expenses” as they appear, ensuring full capture of actual costs.
2. Open Banking Integration
   Secure feeds import your transactions in real time, so your fuel and toll purchases are logged instantly.
3. ATO Prefill & Lodgment
   Employer car allowances appear in your draft return via ATO prefill. Review your calculated deduction and lodge directly with the ATO.
4. Real-Time Refund Estimates
   As you log travel expenses, see your estimated refund update plan your cash flow, knowing your income tax benefit.
5. CPA Review
   For peace of mind, choose a tax agent or CPA review to check your record-keeping, calculations and overall return.
6. ISO 27001-Aligned Security
   All your financial data, trip logs, odometer readings, receipts and statements are protected by enterprise-grade security.

FAQs & Professional Advice

Q: Can self-employed contractors claim home-office travel?
Yes, if your place of work is temporary and you return home at day’s end, those work-related trips are deductible.

Q: How many kilometres can I claim?
Up to 5,000 km per car under the Cents Per Kilometre method; unlimited under the logbook.

Q: What type of vehicle qualifies?
Standard cars and utes under 1 tonne with fewer than nine seats. Heavy vans, trucks or motorcycles require the actual costs method.

For tailored guidance, speak to a tax agent or seek professional advice.

By choosing the right km method, following ATO rules and leveraging Lodge Pro’s automation, you’ll confidently claim your Cents Per Kilometre deduction and drive more savings back into your pocket this tax season. Safe driving and successful tax return lodgment!