Client impact statement: Cents per kilometre claims in ATO’s sights
Under the current rules of substantiation, the maximum distance that a taxpayer can claim without receipts for car expenses is 5,000 kilometres per year. Under this amount, a taxpayer may claim a deduction under ITAA 1997 Div 28 by the cents per kilometre method.
The cents per kilometre method caps the distance limit to 5,000 kilometres, or otherwise at 66 cents per kilometre, at $3,300 per year. If a taxpayer wants to claim an amount above this, additional substantiation is required. Usually, all receipts are required for a deduction, reduced by an amount relating to private use calculated using a current log book.
Recently, the Australian Taxation Office has issued a warning to taxpayers, in particular individuals, who claim right at the maximum limit of $3,300 using the cents per kilometre method. Specifically, they have said that amounts at or near the limit will be deemed at a higher risk for review.
Risk mitigation steps
For taxpayers that are at or near the cents per kilometre limit, there is a specific need to advise them of the specific substantiation requirements for this claim.
When using the cents per kilometre method, there is no specific requirement to keep records for substantiation of the claim. The number of business kilometres claimed, however, must be based on a reasonable estimate.
Business kilometres under the cents per kilometre method is determined by ITAA 1997 s 28-25(3). These are kilometres the car travelled in the course of:
- producing assessable income, or
- travel between workplaces.
The idea of “reasonable estimate” does not have any further clarification in the tax law and takes its ordinary meaning. From a practical perspective:
- irregular work-related travel would need to be specifically listed down in a written record, and
- regular work-related travel (say between two work sites) may be calculated with reference to the number of trips made.
The written evidence of business kilometres travelled for an income year under the cents per kilometre deduction must be retained for five years. There is no need to lodge it with the income tax return, however, details relating to the calculation will be the initial question asked by the ATO in a review.