How drivers could get bigger tax deductions for car expenses within months

Australians could claim larger deductions for motor vehicle expenses in the year ahead after the Australian Tax Office completes its annual review of the cents-per-kilometre rate used to claim work-related tax deductions.

In May, the Tax Office will decide whether to increase the current rate – 88 cents per kilometre – for the 2026-27 financial year as Australians face higher costs at the bowser.

The cents-per-kilometre rate was 66 cents per kilometre in 2017-18 and has increased steadily to 88 cents, where it has remained for the past two years.

This rate is used by sole traders or partnerships (where at least one partner is an individual) claiming for a car, with a maximum claimable distance of 5000 kilometres travelled for business per car, per year.

The cents-per-kilometre rate accounts for all expenses incurred in running a vehicle, including registration, fuel, servicing and insurance, as well as depreciation.

The rate is updated to reflect recent average operating costs for cars, according to the ATO website, drawing on changes in measures such as the “private motoring” subgroup of the consumer price index.

The ATO uses the average reading of the four most recent quarters for which this data is available, comparing it to equivalent data for the previous year.

If the gauge for private motoring costs in the March quarter, due at the end of this month, comes in higher or broadly in line with the previous three quarters, there is likely to be some momentum for an increase in the cents-per-kilometre rate.

AMP deputy chief economist Diana Mousina said petrol prices in March increased by around 45 per cent from their February levels, likely adding to the headline inflation figure.

However, changes in motoring costs published by the Australian Bureau of Statistics are not the only thing the tax office considers when reviewing the cents-per-kilometre rate.

Australian National University tax expert Bob Breunig said that since there was no legislated formula the ATO must use, “they may consider things like tax revenue implications”.

Breunig also said the tax office would likely be considering changes in the broader context of other legislation, such as the fuel excise, which are aimed at discouraging driving. “They may not want to make moves that drastically increase the incentive to drive,” he said.

However, he said the impact of the fuel price shock – which has largely been felt after the March quarter – would also likely be taken into account.

“The ATO would have to be looking at the current circumstances,” he said. “Even if the fuel issues were resolved today, it would take several months for the impact to wash through.”

An ATO spokesperson said the cents-per-kilometre rate was reviewed regularly.

Taxpayers claiming motor vehicle expenses need to apportion for private and business use, understand the expenses they can claim and keep the right records, they said.

Australians claiming a deduction using this method don’t need written evidence to show exactly how many kilometres they have travelled, but the tax office may ask for evidence, such as diary records, for how the distance was determined.

The ATO has also announced separate, targeted support, including more flexible payment plans, for taxpayers affected by high fuel costs.

The Australian Council of Trade Unions, which has called for the federal government to direct the ATO to lift the rate for deductions on workers’ vehicle expenses, said the current rate of 88 cents per kilometre has lagged the increase in fuel costs and fails to reflect the cost to workers of vehicle use.

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