If you have financed a car that you use for work, you may be wondering whether the interest on that loan is tax-deductible. The short answer is yes — but only the portion that relates to business use, and only if you use the logbook method to claim your car expenses. Here is how it works under ATO rules.
Can you deduct car loan interest?
The ATO allows you to claim the interest component of your car loan repayments as part of your motor vehicle running costs — but there are conditions:
- You must use the logbook method. The cents per kilometre method bundles all running costs into a single per-km rate. You cannot add loan interest on top of a cents-per-km claim.
- You can only claim the business-use portion. If your logbook shows 60% business use, you can deduct 60% of the interest paid during the income year.
- You claim the interest, not the principal. The capital repayment portion of your loan is not a deductible expense — it is a repayment of the amount borrowed.
If you are a sole trader or use the vehicle in your business, the interest is claimed as a business deduction. If you are an employee using the logbook method, it forms part of your work-related car expense claim.
How to calculate the deductible amount
The calculation is straightforward once you have three pieces of information:
- Total interest paid during the income year — check your loan statement for the annual interest figure.
- Your business-use percentage — established by your 12-week ATO logbook.
- Multiply the two — this gives you the deductible amount.
Example
Sarah is a mobile bookkeeper who finances her car with a $30,000 loan at 7.5% interest. In the 2025–26 income year, she pays $2,100 in interest. Her logbook shows 65% business use.
Deductible interest = $2,100 × 65% = $1,365
This amount is added to her other running costs (fuel, registration, insurance, servicing, depreciation) and claimed via the logbook method on her tax return.
What records do you need?
The ATO requires you to keep:
- Loan statements showing the interest component of each repayment (most lenders provide an annual summary)
- A valid 12-week logbook establishing your business-use percentage
- Annual odometer readings at 1 July and 30 June
- The loan contract showing the amount borrowed, interest rate, and term
If your lender does not separate interest from principal on your statements, ask for an annual interest summary or use your amortisation schedule to calculate it.
For a full rundown of record-keeping requirements, see our guide on ATO logbook requirements.
Sole traders vs employees
Sole traders and businesses
If you are a sole trader, the business portion of your car loan interest is claimed as a deduction in your business tax return. It forms part of your total motor vehicle expenses. If the car is registered in your business name and used 100% for business, you can claim the full interest amount.
Employees
Employees can claim car loan interest as part of work-related car expenses using the logbook method. The deduction goes at Item D1 of your individual tax return. Remember, if your employer reimburses any of your car costs, you must reduce your claim accordingly.
Companies and trusts
If a company or trust owns the vehicle and makes the loan repayments, the interest is a business expense of the entity. The logbook method still applies to determine the business-use percentage, but the deduction sits in the entity’s tax return rather than an individual’s.
Hire purchase and chattel mortgage
The treatment depends on the type of finance arrangement:
Hire purchase
Under a hire purchase agreement, you are treated as the owner for tax purposes from the start. You can claim:
- Interest — the finance charge component, apportioned for business use
- Depreciation — on the full purchase price of the vehicle (including GST if not registered for GST)
Chattel mortgage
A chattel mortgage works similarly to a standard car loan for tax purposes. You own the vehicle from day one, and you can claim:
- Interest on the loan
- Depreciation on the vehicle’s cost
Novated lease and operating lease
With a novated lease, the lease payments replace separate interest and depreciation claims. You generally cannot claim car loan interest separately because the vehicle is financed through the lease arrangement. If you have a novated lease, the fringe benefit rules apply instead. For more on this, see our car allowance vs novated lease comparison.
Common mistakes to avoid
- Claiming the full repayment — only the interest portion is deductible, not the principal.
- Using cents per km and claiming interest separately — the cents per km rate already covers all running costs. You cannot double up.
- Forgetting to apportion for private use — if your logbook shows 40% private use, you must exclude that 40% from your interest claim.
- Not having a current logbook — without a valid logbook, you cannot use the logbook method at all, and therefore cannot claim interest.
- Claiming interest on a car you do not use for work — if the vehicle is purely for personal use, no part of the loan interest is deductible.
Maximising your deduction
To get the most from your car loan interest deduction:
- Keep your logbook up to date — an accurate business-use percentage ensures you claim every dollar you are entitled to.
- Request annual interest summaries from your lender so you have a clean figure to work with.
- Consider the timing of your logbook period — if you start a new logbook during a high-business-use period, your percentage may be higher. Just make sure it genuinely represents your typical usage.
- Track all running costs — the logbook method lets you claim interest alongside fuel, rego, insurance, servicing, and depreciation. Missing any of these reduces your total deduction.
Let Tripbook simplify the process
Calculating your business-use percentage is the foundation of a car loan interest deduction. Tripbook tracks your kilometres automatically, categorises every trip, and produces the business-use figures you need for your logbook. Combine that with your loan statements and you have a complete, ATO-ready claim in minutes.
