Can I Claim My Car Loan on Tax? Here's What the ATO Actually Allows

It's one of the most-Googled finance questions in Australia: can I claim my car loan on tax? The answer isn't a simple yes or no — it depends on how you use the vehicle, what type of finance you have, and whether you're an employee or a business owner.

Let's cut through the confusion. Here's what the ATO actually allows you to claim, what you can't, and the strategies most people miss entirely.

The Short Answer

You cannot deduct the principal repayments on a car loan — that's not how tax deductions work. But you can claim various expenses related to the loan and the vehicle if it's used for work or business purposes. These include:

• Loan interest (for business use)
• Depreciation of the vehicle
• Running costs — fuel, registration, insurance, servicing
• GST credits on the purchase price (if GST-registered)

The key distinction is: you're not deducting the loan itself — you're deducting the costs associated with using the vehicle for income-producing purposes.

What You Can Claim: PAYG Employees

If you're a PAYG employee, you can claim car expenses for travel that is directly related to earning your income. This includes:

• Driving between two separate workplaces
• Travelling to client sites, meetings, or conferences
• Travel to a workplace that changes regularly
• Carrying bulky tools or equipment that can't be stored at work

What you can't claim: Driving from home to your regular workplace and back. The ATO considers this a private expense, even if the commute is long or inconvenient. This trips up a lot of people.

Method 1: Cents per kilometre

The simplest method. Multiply your work-related kilometres by the ATO rate — currently 88 cents per kilometre for 2025–26.

• Maximum of 5,000 km per year ($4,400 max deduction)
• No receipts required for running costs (but you need a reasonable basis for your km estimate)
• Covers everything — fuel, insurance, depreciation, interest — all bundled into that single rate

Method 2: Logbook method

More effort, but potentially much higher deductions. You keep a logbook for 12 consecutive weeks to establish your business-use percentage, then apply that percentage to your total actual car expenses for the year.

Claimable expenses include:

• Fuel and oil
• Loan interest (yes — this is where the car loan deduction comes in)
• Depreciation
• Registration
• Insurance
• Servicing and repairs
• Tyres
• Car washing (for a work vehicle)
• RACQ / roadside assistance

Example: Your total car expenses (including loan interest and depreciation) are $14,000 for the year. Your logbook shows 60% business use. Your deduction is $14,000 × 60% = $8,400.

A valid logbook lasts 5 years, so the initial 12-week effort pays off for a long time. You can use a paper logbook or an app — the ATO doesn't mind which, as long as it records each trip with the date, start/end odometer readings, kilometres driven, and the purpose of the trip.

What You Can Claim: Business Owners and Sole Traders

If you operate a business (sole trader, company, partnership, or trust), the deductions available are significantly more generous than for employees.

Loan interest

If you've financed the vehicle through a chattel mortgage or business loan, the interest on that loan is tax-deductible as a business expense — proportional to your business use percentage.

Over a 5-year loan, interest deductions alone can amount to thousands of dollars. This is one of the main reasons business owners choose to finance vehicles rather than paying cash — even when they could afford to buy outright.

Depreciation

You can claim the decline in value (depreciation) of the vehicle over its effective life. The ATO sets this at 8 years for most passenger vehicles. Two methods are available:

• Prime cost: 12.5% per year (straight-line)
• Diminishing value: 25% of the remaining value each year (front-loaded, bigger deductions early on)

For eligible small businesses, the instant asset write-off provisions may apply — potentially allowing you to deduct the full cost in the year of purchase (up to the applicable threshold and subject to the car cost limit of $69,674 for 2025–26).

Note: Instant asset write-off thresholds change frequently. Always check the current rules with the ATO or your accountant.

GST credits

If your business is registered for GST, you can claim back the GST included in the vehicle's purchase price on your next BAS — up to the car cost limit. For a vehicle at the limit, that's approximately $6,334 back in your pocket within weeks of purchase.

This applies to the purchase price, not the interest or running costs. You claim the GST on running costs separately on each BAS.

Running costs

All running costs proportional to business use are deductible:

• Fuel
• Registration
• Insurance (comprehensive, third party, CTP)
• Servicing and repairs
• Tyres
• Tolls and parking (business trips only)

What About a Novated Lease?

If you're an employee with a novated lease, the tax treatment is different again. Your lease payments come from your pre-tax salary, which reduces your taxable income. You don't claim individual deductions — instead, the salary packaging arrangement provides the tax benefit automatically through your payroll.

The tax savings from a novated lease depend on your income level, marginal tax rate, and the vehicle's cost. It's worth doing the numbers for your specific situation, or asking your broker to model it.

The Strategy Most People Miss: PAYG Withholding Variation

Here's a powerful tip that most Australians don't know about.

If you have significant car-related tax deductions (from business use), you don't have to wait until tax time to benefit from them. The ATO allows you to apply for a variation to your PAYG withholding — meaning less tax is taken out of each pay, because the ATO acknowledges you'll have legitimate deductions that reduce your taxable income.

Instead of overpaying tax all year and getting a lump sum refund, you get the benefit in every single pay cycle.

Example: $15,000 in annual vehicle deductions at a 37% marginal tax rate = $5,550 in tax savings. That's ~$213 extra per fortnight in your take-home pay, all year round.

We've explained this in full detail in our work vehicle tax savings guide.

Common Mistakes People Make

1. Claiming the home-to-work commute

Unless you meet one of the narrow exceptions (carrying bulky tools, itinerant worker, etc.), your daily commute is not deductible. Don't claim it — the ATO data-matches and audits this regularly.

2. Over-estimating business use percentage

If you claim 80% business use, make sure your logbook supports that figure. The ATO can ask to see your logbook at any time, and an estimate without evidence won't hold up. Keep an honest, accurate logbook.

3. Claiming both methods

You can use EITHER the cents-per-kilometre method OR the logbook method — not both. Choose whichever gives the better result for your situation.

4. Forgetting loan interest

If you're using the logbook method (or you're a business owner), don't forget to include loan interest in your claimable expenses. It's one of the larger deductions available and is often overlooked.

5. Not claiming depreciation

If you own the vehicle (chattel mortgage or outright purchase) and use it for business, you can claim depreciation. Many people don't realise this — or they let their accountant handle it without understanding how much it's worth. Know your deductions.

Summary: What Can and Can't Be Claimed

Expense	Employee (work use)	Business Owner
Loan principal repayments	❌ No	❌ No
Loan interest	✅ Via logbook method	✅ Yes (business use %)
Depreciation	✅ Via logbook method	✅ Yes
Fuel, rego, insurance	✅ Either method	✅ Yes (business use %)
GST credit on purchase	❌ No	✅ If GST-registered
Home-to-work commute	❌ No (limited exceptions)	❌ No (private expense)

The Bottom Line

You can't deduct your car loan repayments directly — but if you use your vehicle for work or business, there are substantial deductions available for the interest, depreciation, and running costs associated with it. The right finance structure can maximise those deductions and save you thousands every year.

If you're not sure what you can claim, or you want to make sure your finance is structured to give you the best tax outcome, get in touch with Flagship Financial. We'll help you understand your options and set things up properly from the start — so you're not leaving money on the table.