Car expenses, overseas travel expenses and what is termed ‘extended domestic travel’ (over five nights away from home) are singled out for special attention by the substantiation provisions.

This applies to self-employed people as well as employees, but not to companies, partnerships and trusts (which, however, may be affected by similar provisions concerning fringe benefits tax).

Car expenses - Substantiation requirements

Taxpayers who use their car for business purposes must normally prove that the tax deductions claimed are for genuine business travel by:

The deductions claimed are based on actual expenses attributable to business usage as recorded in the log book.

Only one log book entry is required for consecutive business journeys.

Business journeys over 5000 km per year

Taxpayers who can show that their business use of a car exceeds 5000 km per year have two other options. They can either:

Business journeys under 5000 km per year

Taxpayers who travel less than 5000 km on business annually have the option of having deductions based on a prescribed rate per business kilometre travelled, which varies with the engine capacity of the vehicle.

Log books

If these formulas do not allow for an adequate deduction, the log book approach can be used to provide proper basis for verifying a higher deduction. The record keeping and paperwork requirements have been reduced from those that originally applied. They are still considerable, however.

The first year

For the first year for which vehicle expenses are claimed, a log book should be kept only for a continuous period of 12 weeks at any time in the year.

Once the extent of business use of the vehicle during the log book period has been established, the taxpayer must estimate the business proportion of vehicle expenses for the full year, taking into account the pattern of use established in the log book period and allowing for variations in the pattern throughout the year, due to things like holidays and seasonal factors.

The proportion of business use nominated for the full year must not exceed the proportion established by the log book records in the 12 week substantiation period.

Claims for more than one car

Where expenses are claimed for more than one car (other than on one of the statutory formulas), log books must be kept for each car.

Subsequent years

In subsequent years, the taxpayer can claim deductions by using the business proportion determined in the first year where, on a reasonable estimate, it has not fallen substantially (that is, by more than 10%).

The taxpayer must also record the total kilometres travelled in each year.

Change of business use

For most taxpayers, business use of a vehicle remains fairly constant. However, if business use changes substantially, the taxpayer must reassess the situation.

Where business use falls by more than 10%, the taxpayer must adopt the lower figure for that year, and keep a log book for another 12 week period in the following year. Alternatively, one of the formulas described above could be used.

A taxpayer who wants to substantiate an increase in the proportion of business travel simply needs to keep a log book for a further 12 weeks.

Change of vehicle

The business travel calculation may be transferred when the car is replaced.

If the claim is wrong

If an audit shows that the business use of a vehicle is in fact substantially less than claimed (that is, by more than 10%):

Where substantial overclaims are detected, the normal regime of penalties applies.

What records must be kept?

It is not necessary to keep receipts for petrol and oil; however, for auditing purposes, the type of vehicle and odometer readings at the beginning and end of each income year must be recorded.

Unregistered vehicles

The motor vehicle substantiation rules do not apply to unregistered vehicles used principally for business purposes, such as on a farm.

Travel expenses

There are recording requirements in addition to the general substantiation requirements for travel expenses claimed as business expenses for:

Essentially what is required is a diary of business activities conducted on the trip.

If the employer pays a travel allowance

It is not necessary to substantiate expenses and keep a diary for domestic travel in excess of five nights away if an employer pays a travel allowance and the commissioner thinks it is a reasonable amount (that is, it does not exceed Australian public service rates, which vary according to the employee’s salary and destination. Details of these rates are available from the local ATO).

There is a more limited concession for international travel (accommodation expenses still require substantiation) but the travel diary requirement must still be complied with.

Self-employed people

Self-employed people, who do not receive travel allowances, must substaniate expenses on extended domestic travel.

Long distance truck drivers

The ATO has indicated that it will not apply the requirements with full rigour to long distance truck drivers, who can claim up to $30 a day for food and drink without receipts, as long as they keep a note of these expenses (ruling IT 2368).

Documentary evidence

Documentary evidence under these provisions is to be kept for five years from the date the relevant tax return is lodged.

This does not mean that the documents can be obtained or records made at any time up to the lodging of the return. The documents must be obtained or the records made at the time the expenses are incurred, or as soon as practicable thereafter.

The ATO has a useful free information booklet on these matters.