Can You Claim a Car Purchase as a Tax Deduction? Rules for Individuals and Businesses

 
Can You Claim a Car Purchase as a Tax Deduction in Australia? Rules for 2025-26

The answer depends on who you are, how you use the vehicle, and what exactly you are trying to claim. The purchase price of a car is not directly claimable in the same way as a work expense is. But the cost of using a car for business or work-related purposes, including a portion of its decline in value, can generate a real and sometimes substantial tax deduction.

This guide covers the rules for employees, sole traders, and businesses, explains how depreciation and the instant asset write-off interact with vehicle purchases, and addresses the questions that the ATO pages do not answer in plain language: Can you claim a financed car? What about a car bought before EOFY? Does commuting count? And how much can you actually save?

The Key Distinction: Purchase Price vs Ongoing Car Expenses

This is the distinction that catches most people out, so it is worth being clear about it upfront.

The purchase price of a car is not a deductible expense in the traditional sense. You do not add $35,000 or $60,000 or $90,000 to your tax return as a deduction in the year you buy a vehicle. Instead, the cost of the car enters the tax system through depreciation, which spreads the deductible portion across multiple years based on the vehicle's decline in value.

For small businesses, the instant asset write-off provides an exception. If the vehicle cost is under the current threshold, the full cost can be deducted in the year of purchase rather than depreciated over time. But this only applies to certain business structures. It does not apply to individual employees.

What individuals and sole traders can deduct directly are the ongoing running costs of the car, which the ATO categories as car expenses. These include fuel, servicing, insurance, registration, loan interest, and the decline in value of the vehicle. They do not include the purchase price itself, principal loan repayments, or modifications that improve the car.

 
Who Can Claim Car Deductions in Australia?

Employees

Employees can claim car expenses for work-related travel, provided they own or lease the vehicle themselves and were not reimbursed by their employer. The two available methods are the cents per kilometre method and the logbook method.

What employees cannot claim is the purchase price of the vehicle, regardless of how much of their work involves driving. An employee who spends 80% of their time visiting clients can claim the running costs of that travel under either method, but the cost of the car itself does not flow through as a direct deduction in their personal tax return.

One important restriction: if you use a car provided by your employer under a salary sacrifice or novated lease arrangement, you cannot claim the running costs. The employer leases the car, pays the running costs, and claims the deductions. You have no car expense claim to make, though you can still claim parking and tolls for work travel in such a car.

Sole Traders and Self-Employed Individuals

Sole traders have access to the same two methods as employees for claiming car expenses. The deduction is claimed in their individual tax return because their business income flows through as personal income.

The difference for sole traders is that a vehicle purchase can also flow through the depreciation system as a business asset. A sole trader with a vehicle used predominantly for business can claim the business-use portion of the vehicle's decline in value under the logbook method, or potentially write off the full cost immediately under the instant asset write-off if they qualify.

Companies, Trusts and Other Business Structures

Companies and trusts cannot use the cents per kilometre or logbook methods. These simplified approaches are only available to individuals. Businesses that operate through a company or trust structure claim vehicle expenses based on actual costs, with the business-use portion determined by records kept throughout the year.

Where a company purchases a vehicle, the depreciation and running costs are claimable as business expenses in proportion to the business use of the vehicle. If the vehicle is also made available for private use by a director or employee, Fringe Benefits Tax may apply, which is covered later in this article.

 
What Trips Actually Qualify? Work Travel vs Commuting

The rule is consistent and firm: travel between your home and your regular place of work is not deductible. It is treated as a private trip, regardless of how far you drive or how work-focused your mindset is on the way there.

The types of travel that do qualify include:
 

• Trips between two different workplaces on the same day (for example, driving from your main office to a client site)
• Driving to a different location to perform work duties when you normally work at a fixed base
• Travel between home and a non-regular work location (such as an unusual job site or a client's office you visit infrequently)
• For home-based businesses, travel from the home office to other work-related locations

There are specific rules for people who transport bulky equipment, carry tools essential to their job, or work across multiple sites. These situations sometimes allow deductions for trips that would otherwise fall into the private-commute category. The circumstances need to be documented carefully and, in borderline cases, professional advice is worth obtaining before claiming.

The Two Methods for Claiming Car Expenses (Individuals and Sole Traders)

The ATO offers two calculation methods for individuals and sole traders. You choose one method per vehicle per year, and you can change methods between years.

Cents per Kilometre Method

The rate for 2025-26 is 88 cents per kilometre, increasing to 91 cents per kilometre in the 2026-27 year. The maximum claim under this method is 5,000 kilometres per year, producing a maximum deduction of $4,400.

The rate is designed to cover all costs of using the vehicle, including fuel, servicing, insurance, registration, and depreciation. You cannot claim a separate depreciation deduction if you use this method.

You do not need to keep a detailed logbook, but you do need evidence that the kilometres claimed were genuinely for work. Diary entries, calendar appointments, job sheets, or similar records are sufficient. The ATO's position is that you should be able to demonstrate the business purpose of each trip if asked.

 
Logbook Method

The logbook method requires maintaining a logbook for at least 12 continuous weeks, recording the date, destination, purpose, and odometer readings for every trip during that period. The ratio of business kilometres to total kilometres in the logbook establishes your business use percentage, which then applies to your actual vehicle expenses for the full year.

The 12-week logbook is valid for five years, provided your driving patterns do not change significantly (typically defined as more than a 10% shift in business use percentage). You do not need to redo the logbook every year.

Under this method, you claim the business-use percentage of all actual expenses: fuel, oil, servicing, tyres, repairs, insurance, registration, loan interest, and the decline in value of the car. If your business use percentage is 70%, you claim 70% of each of those costs.

This method produces a higher deduction than cents per kilometre when you drive more than 5,000 business kilometres annually, have high running costs, or own a vehicle with significant depreciation.

Which Method Gives a Bigger Deduction?

The break-even point varies by vehicle and circumstances, but a rough guide: if you drive fewer than 5,000 business kilometres and your annual running costs are modest, cents per kilometre is simpler and often comparable. If you drive more than 5,000 business kilometres or have a higher-value vehicle with correspondingly higher running costs and depreciation, the logbook method typically delivers more.

Here is a structured comparison:

2025-26 rate/basis	Cents per kilometre (88 cents per kilometre)	Logbook method (Actual expenses x business use %)
Maximum deduction	$4,400 (5,000km cap)	No cap (depends on expenses and business use)
Logbook required?	No - only evidence of business trips	Yes - 12 continuous weeks minimum
Depreciation claimable?	No - included in rate	Yes - up to the $69,674 car cost limit
GST on running costs	No separate GST credit claim	GST credits claimable on actual expenses
Best suited for	Lower business km or simpler situations	Higher business km or high running costs

Buying a Car for Business: How the Deduction Actually Works

When a business or sole trader buys a vehicle, the purchase cost does not become an immediate deduction in its entirety. Instead, it enters the tax system through one of two pathways: depreciation spread over the vehicle's effective life, or the instant asset write-off if the business qualifies and the vehicle cost falls below the threshold.

Depreciation Under the Logbook Method

Depreciation represents the decline in value of the vehicle over time. The two methods the ATO recognises are:
 

• Diminishing value method: applies a higher percentage in earlier years, front-loading the deduction. The rate for most vehicles is 25% of the opening book value per year.
• Prime cost method: applies a flat percentage each year based on the vehicle's effective life. For most cars the effective life is 8 years, producing a rate of 12.5% per year.

 
The business-use percentage applies to the depreciation amount in the same way it applies to running costs. A vehicle with 70% business use generates a depreciation deduction of 70% of the calculated decline in value each year.

Instant Asset Write-Off for Small Businesses

Small businesses with a turnover under $10 million can potentially claim the full cost of eligible assets in the year of purchase rather than depreciating over time. For the 2025-26 financial year, the threshold is $20,000 per asset.

Important note on legislation: The $20,000 instant asset write-off threshold applies for acquisitions made in the 2023-24 year to the 2025-26 year. The legislation to permanently increase the instant asset write-off threshold to $20,000 for small businesses with an aggregated turnover of less than $10 million has been introduced to parliament, but has not yet passed.

If the vehicle costs more than $20,000, the instant write-off does not apply and the car must be depreciated under the general small business pooling rules or the standard diminishing value or prime cost methods.

The instant write-off applies to the business-use portion of the vehicle cost only. A vehicle that costs $18,000 with 60% business use produces an instant write-off claim of $10,800, not $18,000.

The Car Cost Limit

The ATO imposes a maximum cost limit for calculating depreciation and instant write-off for passenger vehicles. For the 2025-26 financial year, this limit is $69,674. This will increase to $69,883 for the 2026-27 year. If you buy a vehicle that costs $90,000 in the 2025-26 year, you can only use $69,674 as the base for calculating your depreciation deduction. The excess cost is not deductible through any mechanism.

The car cost limit does not apply to vehicles that are not passenger cars under the ATO's definition. A ute with a payload of one tonne or more is not classified as a car, and the limit does not restrict depreciation claims for these vehicles.

GST on a Vehicle Purchase

If your business is registered for GST, you can claim a GST credit on the purchase of a vehicle used for business purposes. The credit is one-eleventh of the purchase price, subject to the car cost limit. Based on the 2025-26 limit of $69,674, the maximum GST credit claimable on a passenger vehicle is $6,334, regardless of the actual purchase price.

The business-use percentage also applies to the GST credit. If the vehicle is used 70% for business, the claimable GST credit is 70% of the otherwise creditable amount.

Thinking of buying a vehicle before EOFY?

Whether you are purchasing as a sole trader, through a company, or as an individual employee, the tax implications depend on your structure, your business use percentage, and how the purchase is financed. An H&R Block tax agent can calculate your actual deduction before you buy, so there are no surprises when you lodge.

Find your nearest H&R Block office and book an appointment today.

Financed, Leased and Second-Hand Cars: What Changes?

How you acquired the vehicle affects what you can and cannot claim. This table covers the most common scenarios:

Finance type	Can you claim?	Notes
Outright purchase	Yes	Depreciation or instant write-off applies; purchase price is not directly claimable
Car loan (finance)	Partial	Interest on the loan is deductible for business-use portion; principal repayments are not
Finance lease	Yes	Lease payments claimable for business-use portion; depreciation claimed by lessee
Novated lease	No (individual)	Employer leases the car; individual cannot claim running costs, only parking and tolls
Salary sacrifice car	No (individual)	Employer owns and claims deductions; individual has no claim
Second-hand car	Yes	Depreciation applies from date of purchase; instant write-off available if under $20,000

One point worth emphasising on car loans: the principal repayment is not deductible, but the interest component of each repayment is. If your monthly repayment is $800 and the interest portion is $120, the deductible amount for the business-use percentage calculation is $120, not $800. Your lender should provide an annual statement showing the split between principal and interest.

 
Running Costs You Can Also Claim

Under the logbook method, you claim the business-use percentage of all of the following:
 

• Fuel and oil
• Servicing, repairs and maintenance
• Tyres
• Insurance
• Registration and compulsory third-party insurance
• Cleaning
• Interest on a car loan for the vehicle (not principal repayments)
• Lease payments (for finance leases)
• Decline in value (depreciation)

Tolls and parking are handled differently. They are not included in either the cents per kilometre rate or the logbook method's expense pool. They are claimed separately as work-related travel expenses, and the full work-related portion is deductible without applying the business-use percentage.

You cannot claim running costs in addition to the cents per kilometre rate. The 88-cent rate is designed to cover all running costs. The only additional claims available alongside the cents per kilometre method are parking and tolls.

 
Electric Vehicles, Utes and Motorcycles

Electric and Hybrid Vehicles

Electric vehicles, plug-in hybrid vehicles, and hybrid vehicles that carry fewer than nine passengers and have a payload under one tonne are classified as cars under the ATO's definition. The same rules apply as for any other car: cents per kilometre or logbook method for individuals, depreciation or instant write-off for businesses.

However, there is an important FBT consideration for employer-provided EVs. Electric vehicles below the Luxury Car Tax threshold that are provided by an employer to an employee for private use are exempt from Fringe Benefits Tax under the Electric Vehicle Discount introduced in 2022. This makes employer-provided EVs significantly more attractive from a tax perspective than equivalent petrol vehicles. The exemption does not apply to plug-in hybrids purchased after 1 April 2025.

In the 2026-27 Budget, the Government announced a change to the FBT concessions for Electric Vehicles, commencing 1 April 2027.  From April 1, 2027 to March 31, 2029, the full FBT exemption will only apply to EVs costing $75,000 or less. Vehicles priced between $75,000 and the LCT threshold will receive a 25% FBT discount. From April 1, 2029 onward all eligible EVs below the LCT will receive a permanent 25% discount on payable FBT. This measure has not yet been legislated.

Utes and Commercial Vehicles

A ute, van, or other vehicle with a payload of one tonne or more, or that carries nine or more passengers, does not fall within the ATO's definition of a car. This matters because the car cost limit and the cents per kilometre and logbook methods do not apply. Instead, you claim actual business-use expenses. There is no $69,674 limit on the cost base for depreciation purposes, which makes high-value commercial vehicles potentially more tax-efficient than high-value passenger cars.

Motorcycles

Motorcycles are not classified as cars. They are also excluded from the cents per kilometre and logbook methods. Motorcycle expenses for work use are instead claimed as other work-related travel deductions based on actual costs and business use. The car cost limit does not apply to motorcycles.

 
Fringe Benefits Tax and Business Vehicles

Fringe Benefits Tax becomes relevant when a business provides a vehicle to an employee and that vehicle is available for the employee's private use, including travel between home and work.

For sole traders who use their own vehicle for their own business, FBT does not apply. The deduction is simply through the car expense methods described above.

For companies and trusts where a vehicle is made available to an employee or director for private use, FBT applies at 47% on the taxable value of the benefit. The taxable value can be calculated using two methods:
 

• Statutory formula method: applies a flat 20% to the base value of the car, regardless of actual private use. The base value is the cost price including GST and delivery charges.
• Operating cost method: calculates FBT based on actual costs and the percentage of private use, substantiated by a logbook. This method produces a lower FBT liability if private use is genuinely limited.

 
Company directors who use a company vehicle for private purposes are technically employees of the company and can trigger FBT. This is a common area of compliance risk for small companies where the distinction between business and personal use of a vehicle is not clearly maintained.

 
Is It Worth Buying a Car Before EOFY?

For businesses seeking to claim the instant asset write-off, the timing of the purchase within the financial year matters. The deduction is only available in the year in which the vehicle is first used or installed ready for use. Purchasing and receiving delivery before 30 June means the deduction falls in the current financial year's return. Delivery after 30 June pushes it to the following year.

For individuals using the logbook or cents per kilometre method, the timing of the purchase has a different effect. If you buy a car in June and begin using it for work, you can claim the business-use portion of the running costs from the date of purchase. You cannot claim a full year's depreciation for a car purchased in June, but the depreciation claim begins from the date the car is first used for work.

The question of whether it is worth buying a car specifically for the tax benefit requires careful arithmetic. A vehicle costing $50,000 with 60% business use and a 30% marginal tax rate does not save $15,000 in tax. The depreciation deduction might be around $7,500 in the first year under the diminishing value method, producing a tax saving of approximately $2,250. That needs to be weighed against the full cost of ownership, ongoing running costs, and the fact that the deduction is spread over several years unless the instant write-off applies.

The honest answer for most individuals: the tax benefit of buying a car should be a secondary consideration, not the primary reason for the purchase. The exception is businesses that qualify for the instant write-off and can immediately deduct a substantial portion of the vehicle cost in the year of purchase, where the timing and structure of the purchase can make a material difference to cash flow and tax liability in that specific year.

Common Mistakes When Claiming a Car on Tax

• Claiming the full purchase price as a deduction in the year of purchase. Unless the instant asset write-off applies, the purchase price is depreciated over time, not claimed in full in year one.
• Including commuting in the business kilometre count. Trips between home and a regular workplace are private and cannot be claimed under any method.
• Using cents per kilometre but also claiming depreciation separately. The 88-cent rate already includes depreciation. Claiming both is double-dipping.
• Failing to keep a logbook for 12 continuous weeks before switching to the logbook method. An incomplete or non-continuous logbook is one of the most common reasons the ATO disallows car deductions.
• Applying the business-use percentage to the wrong base. Under the logbook method, the percentage must be established from the logbook and then applied to actual expenses. Using an estimated or assumed percentage without logbook evidence does not satisfy the substantiation requirements.
• Claiming a car not registered in your name without documenting a private arrangement. The ATO allows claims for cars registered to family members if you can demonstrate you are the effective owner or lessee and bear all costs, but the documentation needs to exist.
• Claiming the full cost limit on a vehicle used less than 100% for business. The $69,674 car cost limit applies before the business-use percentage. A vehicle with 60% business use has a depreciable base of the lower of its cost and $69,674, and depreciation is then reduced by the private-use percentage.