Buying a car through your business can be a practical way to fund a vehicle you use for work. It may provide tax benefits, support cash flow and allow you to claim eligible motor vehicle expenses.

However, buying a car through the business does not automatically produce a better tax outcome. The result depends on your business structure, the type of vehicle, how it is financed and how much it is used for business purposes.

Before completing a vehicle purchase, it is important to understand who should own the car, which tax deductions may be available and whether GST or Fringe Benefits Tax could apply.

Should you buy the car personally or through the business?

A business owner may purchase a vehicle personally or have a company or trust buy or finance it.

For a sole trader, the individual and the business are not separate legal entities. The sole trader can generally claim the business-use portion of eligible car expenses through their individual tax return.

A company or trust may purchase the vehicle directly and claim eligible expenses through the entity. However, making a company vehicle available for the private use of an employee, director or their associate may create Fringe Benefits Tax obligations.

Before buying a car, consider:

• Who will legally own the vehicle
• Who will drive it
• The expected business-use percentage
• How much private use is expected
• Whether the business is registered for GST
• How the purchase will affect cash flow
• Whether the arrangement may trigger FBT

The ownership arrangement should also be reflected consistently in the registration, insurance, finance documents and accounting records.

What car expenses can you claim?

The tax deduction available will depend on your business structure, the type of motor vehicle and the method used to calculate the claim.

Eligible motor vehicle expenses may include:

• Fuel or electricity
• Registration
• Insurance
• Repairs and maintenance
• Servicing
• Lease payments
• Interest on vehicle finance
• Depreciation or decline in value

Only the business portion of these costs can generally be claimed. Expenses connected with personal use or private purposes are not deductible.

The vehicle’s purchase price and the principal component of a car loan are not normally claimed as ordinary running expenses. Instead, the business may be able to claim depreciation for the vehicle’s decline in value.

How are car expenses calculated?

Sole traders and eligible partnerships generally have two ATO-approved methods for claiming car expenses: the cents-per-kilometre method and the logbook method.

Companies and trusts generally use the actual-cost method.

Cents-per-kilometre method

From 1 July 2026, eligible taxpayers can claim 91 cents for each business kilometre travelled, up to a maximum of 5,000 business kilometres for each car during the financial year.

The rate includes the car’s running costs and depreciation. This means you cannot separately claim fuel, insurance, registration, servicing or depreciation when using this method.

A detailed logbook is not required, but you must be able to show how you calculated the business kilometres. Diary entries, appointments, client visits and records of business meetings may help support the claim.

Logbook method

The logbook method allows eligible sole traders and partnerships to claim the business-use percentage of their actual car expenses.

A logbook must generally cover at least 12 continuous weeks and reflect the normal use of the car. It can usually be used for five years unless the way the vehicle is used changes significantly.

For example, if the car travels 10,000 kilometres during the logbook period and 7,500 kilometres relate to business travel, the business-use percentage is 75%. You may then claim 75% of eligible expenses.

Actual-cost method

Companies and trusts generally record the actual expenses associated with a business vehicle and adjust the claim for any private use.

This may include fuel, insurance, registration, repairs, lease payments, interest and depreciation. The business must keep records supporting both the expenses and the percentage of business use.

What about utes, vans and commercial vehicles?

Different rules can apply to utes, vans, trucks, minibuses and other vehicles designed mainly to carry goods or passengers.

For tax purposes, a car is generally a motor vehicle designed to carry fewer than nine passengers and a load of less than one tonne. A vehicle outside this definition may need to be treated as an “other vehicle”, which can affect the claim method used.

Sole traders and eligible partnerships generally cannot use the cents-per-kilometre or logbook methods for an other vehicle. Instead, they usually need to claim actual motor vehicle expenses and reduce the deduction for private use.

Commercial vehicles may also receive different treatment under the depreciation, GST and FBT rules. However, an FBT exemption does not apply simply because a vehicle is described as a ute or van.

Limited private use of an eligible commercial vehicle may be exempt from FBT where it is restricted to travel between home and work, travel incidental to employment duties and other private use that is minor, infrequent and irregular.

Dual-cab utes require particular care. Their treatment can depend on their load capacity, passenger-carrying capacity, design and actual use. Check the manufacturer’s specifications before assuming a vehicle qualifies for commercial-vehicle tax treatment.

Depreciation and the car limit

When a business purchases a vehicle, it may be able to claim depreciation for its decline in value.

For the 2026–27 financial year, the maximum value generally used to calculate depreciation for a passenger car is $69,883. This is known as the car limit.

If a passenger car costs more than the car limit, depreciation is generally calculated using the limit rather than the vehicle’s full purchase price.

For example, if a luxury vehicle costs $90,000, the business will not usually claim depreciation on the entire cost. The depreciable value will generally be restricted to the applicable car limit and then adjusted for the percentage of business use.

The car limit may not apply to certain commercial vehicles that are not designed principally to carry passengers.

Can you use the instant asset write-off?

The instant asset write-off allows eligible small businesses to claim an immediate deduction for the business portion of certain assets costing less than the applicable threshold.

The Australian Government has introduced legislation to make the $20,000 instant asset write-off permanent from 1 July 2026 for eligible small businesses with aggregated annual turnover of less than $10 million. At the time of publication, the bill is still before Parliament and had not yet become law.

Even when the $20,000 threshold applies, most new passenger vehicles will cost too much to qualify.

The threshold is based on the cost of the entire asset, rather than the amount left after applying the business-use percentage. A $40,000 car will not qualify simply because it is used 50% for business.

Vehicles costing more than the threshold may instead be depreciated or added to the small business depreciation pool, depending on the rules applying to the business. The car limit may also restrict the amount that can be depreciated.

An instant asset write-off can reduce taxable income, but it does not mean the Australian Taxation Office refunds the full cost of the vehicle. A tax deduction should not be the sole reason for making a purchase.

Can you claim a GST credit?

If your business is registered for Goods and Services Tax and buys a vehicle for business use, it may be able to claim a GST credit for the business-use portion of the GST included in the purchase price.

For example, if a vehicle is used 80% for business and 20% privately, the business may generally claim 80% of the available GST credit.

For passenger vehicles costing more than the car limit, the maximum GST credit for 2026–27 is generally $6,353, being one-eleventh of the $69,883 car limit. This cap may not apply to some qualifying commercial vehicles.

The business will generally need a valid tax invoice to claim the credit through its Business Activity Statement.

When does Fringe Benefits Tax apply?

Fringe Benefits Tax may apply when an employer makes a business car available for the private use of an employee, director or their associate.

A vehicle can be considered available for private use even when it is not actually driven privately. For example, a car garaged at an employee’s home may create an FBT obligation.

FBT is paid by the employer and is separate from income tax. It is calculated using the taxable value of the benefit and the relevant gross-up rules. The current FBT rate is 47%.

Employers may use the statutory formula method or operating-cost method to calculate a car fringe benefit. The operating-cost method uses actual running costs and logbook records to determine the taxable value.

Sole traders do not generally pay FBT on a vehicle they use themselves because they are not employees of their own sole trader business. Instead, they exclude the private-use portion when claiming deductions.

What about electric vehicles?

Eligible battery-electric and hydrogen fuel-cell vehicles may qualify for an FBT exemption when provided to an employee or director.

The conditions include requirements relating to when the vehicle was first held and used and whether luxury car tax was payable.

Plug-in hybrid electric vehicles generally stopped qualifying for the exemption from 1 April 2025. Transitional arrangements may apply to vehicles provided under certain financially binding commitments entered into before that date.

Even when no FBT is payable, the benefit may still need to be calculated for reporting purposes.

Should you buy, finance or lease the vehicle?

A business may pay cash and buy the car outright, take out a loan, enter into a hire purchase arrangement or lease the vehicle.

Each option can affect ownership, tax deductions and cash flow differently.

Where a vehicle is purchased using a car loan, the business-use portion of the interest may be deductible. The principal repayments are not generally deductible, although depreciation may be claimed where the business is treated as the owner.

Lease payments may be deductible to the extent that the vehicle is used for business purposes. The treatment will depend on the terms of the agreement.

Buying the car outright avoids ongoing finance costs but requires more cash upfront. Finance or leasing can preserve working capital, although the business needs to consider interest, fees, repayments and the total cost over the life of the arrangement.

What records should you keep?

Good records are essential when claiming motor vehicle expenses.

Depending on the method used, records may include purchase contracts, tax invoices, finance agreements, registration, insurance, receipts, servicing invoices, odometer readings, logbooks and calculations showing the business-use percentage.

Records should also clearly separate business travel from personal use.

This is particularly important for a home-based business. Travel from home to a regular workplace will not automatically qualify as deductible business travel simply because the business is operated from home.

What happens when the vehicle is sold?

Selling or trading in a business vehicle can create further tax obligations.

A depreciation adjustment may be required based on the amount received and the vehicle’s written-down value.

If a GST-registered business sells or trades in a vehicle used in its operations, GST will also generally apply to the sale. This can apply even when the buyer is a private individual.

For example, if the vehicle is sold for $22,000 including GST, the business would generally report $2,000 as GST on its BAS. It is worth allowing for this when setting the sale price, as the full amount received will not necessarily remain in the business.

Bonerath & Co. can help with your vehicle purchase

Buying a car through your business may offer genuine tax and cash flow advantages, but the right approach depends on your circumstances.

Before completing a vehicle purchase, it is important to understand:

• Who should own the vehicle
• Which car deductions are available
• How private use will be treated
• Whether the car limit or instant asset write-off applies
• Whether a GST credit can be claimed
• Whether the arrangement will trigger FBT obligations
• How the purchase will affect cash flow

The team at Bonerath & Co. can help you compare your options and understand the tax implications before you purchase, finance or lease your next business vehicle.

Contact the team today to discuss your circumstances.

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The information in this article is general in nature and does not take into account your individual circumstances. Tax treatment depends on factors including your business structure, the vehicle, the finance arrangement and how it is used. Seek advice from a registered tax professional before making a purchase or claiming a deduction.

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