Do you use a vehicle for your business?

There are different treatments to obtain income tax deductions for motor vehicle expenses, depending on the type of business entity.

A motor vehicle may be used by a sole-trader or partners in a partnership for both business and private purposes. In this situation, two methods can be used to calculate the deductible portion of motor vehicle expenses: the cost method or the kilometre rate method.

Traditionally, motor vehicle expenses incurred by a company will be fully deductible in most cases but subject to fringe benefit tax (FBT) if the motor vehicle is available for private use by employees.

Recent amendments to the income tax legislation however, now allow certain close companies to elect to use motor vehicle expenditure rules (where the only fringe benefit provided is the provision of one or two motor vehicles to shareholder-employees for their private use) to calculate deductions for motor vehicles instead of paying FBT.

If a close company elects to use the motor vehicle expenditure rules (e.g. kilometre rate method, or cost method) instead of paying FBT on the value of the benefit, then the election will apply only to new arrangements between a company and shareholder-employees. Once a company has chosen to use this method, it will need to continue to use it until the vehicle is disposed of or the company stops using the vehicle for business use.

Where a person intends to claim an expense deduction for a motor vehicle that is used partly for business purposes and partly for other purposes, they must calculate the proportion of business use by using either a logbook or actual records. Where no logbook or other records are maintained, 25% is the maximum percentage allowed for business deductions.

Kilometre rates can be used when reimbursing staff, including shareholder-employees using their own vehicle for work.

Here’s a summary:

You can now claim a deduction/reimbursement based on a kilometre rate method. This method uses set rates, which are divided into two tiers:

• First tier – recovery of both the vehicle’s fixed costs and its per kilometre running costs, for the first 14,000 kms.
• Second tier – recovery of the vehicle’s per kilometre running costs only, after 14,000 kms. 

The following rates per kilometre will apply for the 2017/2018 income year:

 
Note that for the 2018/19 income year, employers may reimburse employees using the new Tier One rate of 76 cents per kilometre from 4 July 2018 (being the date of an Operational Statement released by Inland Revenue). However, the two-tiered rates as set out above must be used for the 2019/20 and subsequent income years.

For the 2016–2017 and earlier income years, you can only use the kilometre rate for business travel up to 5,000km per year.

The legislation can be tricky, but with a little advice from an expert (like us!) you can rest assured you’re paying the correct amount of tax and staying onside with the IRD. 

UPDATE:
The following rates per kilometre apply for the 2018/2019 income year:

DISCLAIMER: Our blog posts are of general nature and are intended to provide basic guidance. They are not intended to constitute accounting, tax, or other professional advice.