Introduction

With the 2025–26 tax return season now open, motor vehicle expenses are one of the most commonly claimed — and most frequently scrutinised — deductions on Australian tax returns. Whether you’re an employee who drives between job sites, a sole trader using your car for business, or an employer providing vehicles to staff, the rules are specific and the ATO is watching.

Getting your car deduction right means understanding which method applies to you, what trips actually qualify, and what records you need to back up your claim. This guide covers everything you need to know for your 2025–26 return.

Who Can Claim Car Expenses?

For ATO purposes, a car is a motor-powered road vehicle — including petrol, diesel, hybrid, plug-in hybrid or battery-electric — designed to carry fewer than nine passengers and a load of less than one tonne.

Employees and individual business taxpayers (including sole traders and individual partners in a partnership) can use the two standard car-expense methods, provided they own, lease, or hold the car under a hire-purchase agreement. If your car is provided through salary sacrifice or a novated lease, you generally cannot claim personal running costs — the employer handles the tax treatment through FBT.

Important: Motorcycles, scooters, utes designed to carry one tonne or more, and vehicles with nine or more passenger seats are not cars under these rules. You may still claim work-related costs for these vehicles, but you must use actual expenses and records — not the standard car methods.

The Two Methods for 2025–26

1. Cents Per Kilometre Method

The 2025–26 rate is 88 cents per kilometre, capped at 5,000 kilometres per car. This gives a maximum calculation of $4,400 — but that is not an automatic deduction. You must be able to demonstrate how you calculated your eligible kilometres.

The rate covers all running costs, including:

• Fuel or electricity
• Registration and insurance
• Servicing, repairs and maintenance
• Decline in value (depreciation)

This means you cannot claim these costs separately on top of your cents per kilometre claim. You also cannot add an instant asset write-off for the same car.

Records required: You don’t need receipts for individual expenses, but you do need evidence of your work-related kilometres — diary entries, calendar records, trip logs, or the ATO’s myDeductions app all work.

Note: The 91 cents per kilometre rate applies from 1 July 2026 (the 2026–27 year). Do not use this rate on your 2025–26 return.

2. Logbook Method

The logbook method lets you claim the work-related percentage of your actual car expenses. If your logbook shows 65% business use, you can claim 65% of fuel, insurance, registration, servicing, interest on a car loan, and depreciation.

Logbook requirements:

• Must cover a continuous 12-week period representative of your annual travel pattern
• Each trip entry must include: date, start and end odometer readings, kilometres travelled, and a meaningful description of the business purpose (not just “business”)
• A valid logbook lasts five years, but you must record odometer readings at the start and end of every income year you use it
• If your travel pattern has changed significantly, you’ll need a new logbook

Records required: Receipts and invoices for all actual expenses claimed, plus the logbook and odometer records.

What Trips Are Deductible?

This is where many taxpayers go wrong. The ATO distinguishes between travel that is part of performing your work duties and travel that merely gets you to work.

Deductible trips include:

• Driving from your regular workplace to a client, supplier or work site
• Travelling directly between two separate workplaces
• Driving during the working day to perform employment or business duties

Not deductible:

• Ordinary travel between home and your regular workplace — this is private travel, regardless of how far you live, whether you work unusual hours, or whether public transport is unavailable
• Carrying a laptop or minor work items does not make a commute deductible

Limited exceptions apply where:

• Your home is genuinely a base of employment and work duties begin there
• You must transport essential, bulky equipment that cannot be securely stored at your workplace
• Your work is genuinely itinerant, with no fixed workplace

These exceptions are fact-specific. If you’re unsure whether your travel qualifies, speak with a registered tax agent before lodging.

Business Vehicles: Depreciation and the Instant Asset Write-Off

The Car Depreciation Limit

For 2025–26, the depreciation cost limit for passenger cars is $69,674. If your car costs more than this, depreciation is calculated on $69,674 — not the actual purchase price. This is a depreciation cap, not a general write-off threshold.

Small Business Instant Asset Write-Off

If your business has aggregated annual turnover below $10 million and you use the simplified depreciation rules, you may be able to immediately deduct the business-use portion of an eligible asset costing less than $20,000.

Key rules:

• The threshold is strictly less than $20,000 — an asset costing exactly $20,000 does not qualify
• The asset must be first used or installed ready for use by 30 June 2026
• For passenger cars, the depreciation car limit ($69,674) applies first — meaning most cars will not qualify for the instant write-off and instead enter the small business pool

Assets costing $20,000 or more go into the small business pool and are deducted at 15% in the year of addition and 30% in later years.

Employer-Provided Vehicles and FBT

If your business provides a car to an employee (including a director) that is available for private use — including home-to-work travel — a car fringe benefit may arise. This is an employer obligation, separate from the employee’s income tax return.

The FBT rate for the year ending 31 March 2026 is 47%. Employers can value the benefit using:

1. Statutory formula method — generally 20% of the car’s base value, adjusted for days available for private use
2. Operating cost method — actual operating costs multiplied by the private-use percentage (requires a valid logbook)

Common FBT mistakes to avoid:

• Assuming utes and dual-cab vehicles are automatically exempt (they’re not always)
• Treating home-to-work commuting as business travel
• Using an invalid or vague logbook
• Failing to lodge an FBT return because you assumed no liability existed

Electric Vehicle FBT Exemption

Battery-electric and hydrogen fuel-cell cars provided to employees may be exempt from FBT where:

• The vehicle meets the ATO car definition
• It was first held and used on or after 1 July 2022
• It has never been subject to luxury car tax

Important: Even exempt EVs must be reported. If the notional taxable value exceeds $2,000 in the FBT year, the grossed-up amount must appear on the employee’s payment summary.

PHEVs: Plug-in hybrid electric vehicles generally lost their FBT exemption from 1 April 2025. Grandfathering may apply where a binding financial commitment existed before that date, but any change to the arrangement — including a new employer or broken novation — can end eligibility.

Common Mistakes That Attract ATO Attention

The ATO actively reviews motor vehicle claims. Watch out for these red flags:

• Using the 2026–27 rate (91 cents) on a 2025–26 return
• Treating the 5,000 km cap as an automatic entitlement without evidence
• Claiming fuel, repairs or depreciation on top of a cents per kilometre claim
• Claiming ordinary home-to-work commuting
• Using car methods for a motorcycle or heavy vehicle
• Relying on a vague or unrepresentative logbook
• Claiming an instant write-off for an asset costing $20,000 or more
• Assuming employer-provided EVs require no FBT reporting

Sources

• ATO: Deductions for Motor Vehicle Expenses
• ATO: Cents Per Kilometre Method
• ATO: Logbook Method
• ATO: Work-Related Car Expenses 2026 (myTax Instructions)
• ATO: Trips You Can and Can’t Claim
• ATO: Instant Asset Write-Off for 2025–26
• ATO: Electric Cars FBT Exemption
• ATO: FBT on Plug-In Hybrid Electric Vehicles
• ATO: FBT Rates and Thresholds

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