The devil is in the detail
The key message in this article is that if you do not correctly prepare and retain your vehicle logbook then the ATO can deny your logbook motor vehicle tax deductions in full as a recent ATO case has demonstrated. This applies to businesses as well as individuals.
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Why is this important?
One of the biggest tax deductions many businesses and individuals claim are the cost of operating their motor vehicles. If you choose to use the “logbook” method for calculating your tax deduction, then the value of the deduction can amount to tens of thousands of dollars in your pocket every year.
Because of this many taxpayers rightly seek to maximise their claims each year to minimise their tax. On the flip side the ATO are aware of these lucrative tax deductions so they are increasingly devoting effort to monitoring and checking on tax law compliance. The problem arises if you fail an ATO audit because the implications and cost of being denied a motor vehicle tax deduction are quite significant – especially over a four-year audit window. We are talking tens of thousands of dollars in tax to backpay and potentially that amount again in penalties.
So how do you ensure that you pass an ATO audit on your motor vehicle tax deductions? Well it really comes down to two things,
- Keeping the right records to substantiate the costs and claim
- Applying the law correctly to calculate the claim
The intent of this article is to focus on the substantiation or “records” that you need to retain for motor vehicle logbook deductions. Essentially you need to keep all of the receipts associated with your claim each year (fuel, registration, insurance, maintenance, interest on finance and the cost of acquiring the vehicle) for a period of five years after the tax return is assessed. If you want to use the logbook claim method, then you also need to make a valid logbook and retain if for five years.
Under the logbook method of calculation, you basically pool all costs of operating that vehicle and multiply that amount by the percentage business use from the logbook to determine the amount to claim.
Your logbook must contain:
- when the logbook period begins and ends (over a 12-week period)
- the car’s odometer readings at the start and end of the logbook period
- the number of kilometres travelled for each journey. If you make two or more journeys in a row on the same day, you can record them as a single journey
- the odometer readings at the start and end of each subsequent income year your logbook is valid for
For each journey, record the:
- reason for the journey (such as a description of the business reason or whether it was for private use)
- start and end date of the journey
- odometer readings at the start and end of the journey
- kilometres travelled.
Importantly the logbook must be made and completed at the time of undertaking the trips or as soon as possible thereafter (but not well after the trip).
A recent appeal case in the administrative appeals tribunal found in favour of the ATO Commissioner’s decision to deny the motor vehicle claim on the basis that the logbook was not valid. The taxpayer claimed 91% of their Mercedes car as a deduction based on the logbook they provided under audit. Their reasoning was,
- There were multiple inconsistencies which indicated the entries were not made contemporaneously (e.g., inconsistencies between the day of the week and the date, the same odometer readings on different dates, dates repeated, entries on days the taxpayer was sick and on personal leave);
- There were entries that were not contemporaneous as they were not made at or as soon as possible after the end of the journey.
- There were entries that were inconsistent with other documents and information provided to the Commissioner; and
- There were journeys that were not sufficiently descriptive to enable the entries to be classified as a business journey (described as “customer visit”).
We have seen cases where the tax commissioner cross-checked logbook entries against toll road records to find inconsistencies. Clearly the ATO is prepared to undertake a detailed investigation into these logbooks to ensure they are correctly maintained.
Importantly the Commissioner can deny the deduction on the basis that the logbook was invalid as in this case. It only takes one or two facts in the trips to be incorrectly documented and its game over. And the Commissioner will then generally go back and deny the prior year’s claims up to four years. So, a $10,000 tax benefit each year ends up being $40,000 backpay tax plus potentially another $40,000 more in penalty and interest. That is an $80k hit simply because you did not take the appropriate care with your logbook record.
The moral of the story is – make sure you make and retain a valid vehicle logbook for the purpose of substantiating the business percentage of the motor vehicle claim. If you don’t It can be very costly.