Motor Vehicle Deductions

For motor vehicles acquired on or after 1 April 2011

Introduction

There are a number of different treatments in operation to obtain income tax deductions for motor vehicle expenses. It will depend on the type of business entity that operates the vehicle. This guide explains the fundamental rules surrounding motor vehicles and income tax deductions.

Partnerships and sole traders

Motor vehicle deduction rules

Motor vehicle expenses are generally deductible for income tax purposes, if the vehicle is used to help earn income for the business.

If the vehicle is not used exclusively for the business (travelling to and from home is not a business related expense) then you are not able to claim 100% of the vehicle expenses. So you need to work out the business use of the motor vehicle.

How to calculate business use

There are two ways you can calculate the business proportion of your motor vehicle use. You can either use actual costs, or a logbook (see below for detail).

Kilometre rates

Once you calculate the business proportion, you can choose to use kilometre rates to calculate how much you can claim for the cost of using your motor vehicle for business purposes.

The kilometre rates apply for petrol, diesel, hybrid and electric vehicles. They apply irrespective of engine size and do not apply to motorcycles.

Now there is also a two tier rate:

Tier One is calculated as a combination of the vehicles’ fixed and running costs. It applies for the business portion of the first 14,000km travelled by vehicle in a year
Tier Two accounts for running costs only and applies for the business portion of any travel in excess of 14,000km.

2017/2018 Kilometre Rates
Vehicle Type	Tier One Rate	Tier Two Rate
Petrol or Diesel	76 cents/km	26 cents/km
Petrol Hybrid		18 cents/km
Electric		9 cents/km

Once you have elected to use the kilometre rates method you must continue to use it for this motor vehicle.

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.

Actual costs

You can claim deductions on your actual costs including depreciation loss for the business use of your motor vehicle. If you use this method you must keep accurate records including details of private and work-related expenses. Your records will need to show the reasons for and the distances of journeys for business travel.

Vehicle log book

You can use a logbook to record all business trips and then calculate an actual business use percentage for each period.

Alternatively you can keep the logbook for at least 90 consecutive days to work out the business use of your vehicle. You can continue to use this calculation over a three year period as long as the use of the vehicle or the nature of the business varies by less than 20% over the three years.

Once you have calculated a business use percentage, you can use this to calculate the deduction to claim for costs and depreciation loss for the business use of your motor vehicle for GST and income tax purposes.

What to record

The log book must record the:

start and end of the 90-day test period
vehicle’s odometer readings at the start and end of the test period
distance of each business journey
date of each business journey
reason for each business journey, and
any other detail that IRD may ask you for

You can determine a percentage of business running costs from the logbook.

At the end of the three year period, start a new logbook.

See below for Example of vehicle logbook.

If no vehicle log book is kept

If you don’t keep a logbook, and the vehicle has an element of private use (perhaps going from home to work), then the maximum amount able to be claimed for income tax purposes is 25%.

The GST legislation does not have this same allowance. If a car has an element of private use but no logbook is kept, you cannot claim a deduction for any GST on that vehicle’s expenses.

Example of vehicle log book

Vehicle log book
Vehicle Description: Ford Fairmont
Vehicle Registration Number: EER 6952
Date	Time	Starting kms	Ending kms	Difference	Origin/Destinations	Reason
1 Feb 16		65423
10 Feb 16	9.08am	65423	65555	132	Office/Mr Hammer/Office	Quote
5 Mar 16	4.30pm	67345	67349	4	Office/Bank/Office	Banking
25 Mar 16	4.30pm	68216	68220	4	Office/Bank/Office	Banking
5 Apr 16	8.30am	68250	68271	21	Office/Mrs/Marsh/Office	Delivery
14 Apr 16	6.00am	68554	68963	409	Office/Rotorua	Industry Conference
17 Apr 16	5.00pm	68972	69382	410	Rotorua/Office	Industry Conference
30 Apr 16			70125

Total distance travelled				980

Calculation of business use percentage:

Business use	=	total business distance travelled		980	=	20.84%
Percentage	=	total distance travelled		(70125 − 65423)	=	20.84%

Business use percentage = Total business distance travelled/Total distance travelled = 980/(70125-65423) = 20.84%

GST claims for sole traders, partnerships and trusts

Intended use

When a motor vehicle is purchased the amount of the GST claim for that purchase depends upon the intended percentage of use of the vehicle to make taxable supplies.

When claiming GST on the initial acquisition of a vehicle, you need to estimate the percentage of use that the vehicle will be used to make:

Taxable supplies,
GST exempt supplies, and
Personal use

The GST input tax on the vehicle will then be apportioned based on those percentages, and an input tax deduction will be available for the percentage applicable to making taxable supplies.

A de minimus threshold applies so GST exempt supplies can be disregarded in calculating the percentages if the value of exempt supplies will not be more than the lesser of:

$90,000, or
5% of the total consideration for all their taxable and exempt supplies for the period

Initial cost

Identify the amount of input tax on the supply
Identify the percentage of intended use to make taxable supplies
Multiply input tax amount at 1. by percentage in 2.
Amount to claim is the result from 3.

Note the normal requirements for claiming input tax still need to be satisfied; e.g. holding a tax invoice, payment has been made in the case of a person registered on the payments basis or for second-hand goods, and the associated person limitations.

Changes in use

Adjustments required

As the actual use for making taxable supplies can be different from the estimated intended use at acquisition, adjustments may be needed at the end of an adjustment period.

Note: No further adjustments are required:

For a vehicle that cost less than $5,000 no adjustment is needed in subsequent periods, or
Where the intended use on acquisition versus actual use differs by less than 10% unless the adjustment is more than $1,000, or
Where the actual use in the relevant adjustment period and the actual use in the previous adjustment period differs by less than 10% unless the adjustment is more than $1,000, or
The value of exempt supplies will not be more than the lesser of:
$90,000, or
5% of the total consideration for all their taxable and exempt supplies for the period

There are limits on the number of adjustments periods for which an adjustment is made. Once the limit is reached, no further adjustments are made.

The limits are:

Maximum adjustment periods (based on GST exclusive cost)

Cost $5,001 − $10,000 − 2 adjustment periods
Cost $10,001 − $500,000 − 5 adjustment periods
Cost $500,001 or more − 10 adjustments

Where an adjustment is required, the adjustment is made at the end of each adjustment period.

Adjustment periods

The first adjustment period starts when the asset is acquired and ends at the person’s choice either the:

First balance date that falls after acquisition; or
The balance date that falls at least 12 months subsequent to acquisition

Subsequent adjustment periods start after the end of the previous adjustment period and end 12 months later.

Calculating the adjustment

Adjustments are not simply an input/output adjustment based on the actual change in use between adjustment periods, but look at the average taxable vs. non-taxable use over the entire period of ownership since acquisition.

See below for example calculation.

Example calculation for adjustment

Car purchased at start of year for $23,000 including GST of $3,000.

As the cost is more than $10,000, there will be a total of 5 adjustment periods (if the vehicle is kept that long).

Estimated use is 70% business and 30% private

Initial input tax claim

Initial input tax claim is 70% of $3,000 = $2100

Subsequent adjustments

First adjustment period

At the end of the first adjustment period 12 months later at balance date, actual business use is 55%

(55% × 12/12) = 55%

Percentage difference is 15%

Output tax adjustment is 15% of $3,000 = $450

Second Adjustment period

At the end of the second adjustment period 12 months later, when the vehicle has been owned for 24 months, the actual business use for that period is 65%

Calculation is:

(55% × 12/24) + (65% × 12/24)

= 27.5 + 32.5 = 60%

Percentage difference to previous adjustment is 5%

The output tax adjustment would be $150 … BUT

No adjustment is required for this adjustment period as the percentage difference is less than 10% and the amount is not more than $1,000

Third Adjustment period

The vehicle is sold in the following year for $10,000 including GST of $1,304.34, so there is no adjustment for this period.

Instead, GST is payable on the full sale price, but because the full input tax deduction wasn’t claimed, a further input tax adjustment on disposal is allowed.

GST on sale

What can be claimed

When the vehicle is eventually sold, GST is payable on the full sale price, but a further input tax deduction is allowed for the lesser of:

The total input tax charged on purchase of the vehicle, or
An amount calculated under the following formula:

Tax fraction x consideration × (1 − actual deduction/full input tax deduction)

Continuing the example, the total input tax on purchase was $3,000, but only $1,650 in total has been claimed (initial claim of $2,100 less the $450 output tax adjustment in the first adjustment period and the nil adjustment in the second adjustment period), and the consideration for the sale is $10,000.

The amount for 1 above is $3,000, but the amount from applying the formula in 2 is:

3/23 × 10,000 × (1 − 1650/3000) =

$1,304.34 × (1 − 0.55) =

1,304.34 × 0.45 =

$586.95

Therefore an amount of $586.95 is claimable as a further input tax adjustment against the GST payable on the sale of the vehicle.

Fringe benefit tax for companies

Where FBT applies

As an employer, if you make a vehicle available to an employee to use privately you’ll have to pay FBT. This applies on vehicles made available to:

Employees (and their associated persons), and
Shareholder-employees

This applies whether the vehicle is actually used for private purposes or not.

Fringe benefit tax does not apply to vehicles that come within the definition of being ‘work related vehicles’. Fringe benefit tax also does not apply for certain emergency calls and some out of town travel.

With respect to Look Through Companies (LTC), fringe benefit tax does not apply to working owners. Such benefits are treated as a distribution of profit to the working owner to the extent of the private use.

Sole traders and partners in a partnership don’t pay FBT on business vehicles they use. Instead they make income tax and GST adjustments for private use.

Option for close companies

Close companies providing motor vehicle to shareholder-employees can now elect to apply the motor vehicle deduction rules (outlined earlier in this guide) and therefore not have pay FBT on the benefit provided to shareholder- employees.

The election will apply only to new motor vehicle arrangements between close companies and shareholder-employees, and will continue to apply until the close company stops using the motor vehicle for business use or until the close company disposes of the motor vehicle.

Work related vehicles

Not all ‘business’ vehicles are ‘work-related vehicles’ for FBT purposes. To qualify as a work-related vehicle, these requirements must be met:

The principle design of the vehicle cannot be for carrying passengers. Vehicles that qualify include utes; light pick-up trucks; vehicles without rear seats such as vans, station wagons, hatchbacks and four wheel drives; or where the rear seats have been welded down or made unusable because of fixtures such as shelving. Taxis and minibuses are included
The company’s name or logo must be permanently and prominently displayed on the exterior of the vehicle. Magnetic or removable signs are not acceptable
The company must notify affected employees or shareholder-employees in writing that the only private use allowable is travel between home and work, or travel incidental to business travel. It is advisable that this notification be by way of letter, rather than just referring to it in an employment agreement
The company must record quarterly checks on each vehicle, to ensure the restriction is being followed. For example, the company might check the logbook and petrol purchases

FBT and private use

If a work-related vehicle meets the conditions above but is available for private use on certain days, such as Saturdays and Sundays, a partial exemption is available.

If a vehicle is stored at a company shareholder’s home which is also the company’s premises, there must be no private use of the vehicle at all in order to qualify for the above exemption.

If the shareholder’s home is a secondary place of business there must be a private use restriction to qualify for the exemption. The company would have to show that the vehicle is not available for private use.

Trucks and buses

Vehicles with a gross laden weight of more than 3,500 kilograms are not subject to FBT. This tends to cover all larger trucks and buses.

How is the FBT calculated?

FBT is calculated based on either the vehicle’s cost price (including GST), or on the vehicle’s tax value
A motor vehicle’s tax value is its value for tax depreciation purposes at the beginning of the relevant tax or income year
Once you have chosen to use either the cost or tax value option you must continue that option until either the vehicle is sold, the vehicle lease ceases or five years have passed
If you are using the cost price option, FBT is calculated at 5% per quarter of the GST inclusive cost price of the motor vehicle, multiplied by 49.25%, being the fringe benefit tax (using the single rate FBT option)
If you are using the tax value option, FBT is calculated at 9% per quarter of the GST inclusive depreciated value of the motor vehicle, multiplied by 49.25% being the fringe benefit tax (using the single rate FBT option)
The FBT liability is reduced by the number of the days the vehicle was not available for private use or was exempt from FBT
FBT is normally payable quarterly
There is a provision for FBT on the provision of the motor vehicle to be paid at 43%. If the employee is on a salary of less than $70,000, this is an option that should be considered. It does involve reconciliation at the end of March each year. Consult your chartered accountant for further details on this option

Restricted private use by shareholder

It may be possible to claim that a shareholder employee only has the vehicle available for private use on certain days.

In order to claim that a shareholder-employee has restricted private use of a company vehicle, Inland Revenue considers that the company must:

Show details of the restriction
Confirm that the shareholder-employee is aware of the restriction
Maintain a log book recording both business and private mileage on a daily basis or elect to maintain a three month test period to establish the use of a vehicle by an employee
Produce a log book on request as evidence that the restriction has been complied with

Reimbursements for vehicle running costs

Employees

To reimburse staff, including shareholder-employees using their own vehicle for work, you can use:

Inland Revenue’s kilometre rate, or
Rates published by a reputable independent New Zealand source representing a reasonable estimate (for example New Zealand AA mileage rates), or
Actual costs

It is also possible to use published mileage rates from other organisations. The rates must be a reasonable estimate of costs.

Kilometre Rates

Inland Revenue will accept the standard kilometre rate as being a reasonable estimate of the costs likely to be incurred by an employee. An employer may choose to use the applicable vehicle type rate per kilometre for reimbursing employees. Note the rate does not apply to motorcycles.

Where an employee has kept a logbook or other evidence that confirms their employment use, the 76 cents/km rate can be applied to the first 14,000km. If evidence has not been kept the rate of 76 cents/km will be limited to the first 3,500km (25% of 14,000). Above the 3,500km figure the Tier Two rates may be used for kilometres travelled for work.

2017/2018 Kilometre Rates
Vehicle Type	Tier One Rate	Tier Two Rate
Petrol or Diesel	76 cents/km	26 cents/km
Petrol Hybrid		18 cents/km
Electric		9 cents/km

Actual costs

You can reimburse an employee’s actual costs instead of using the kilometre rates. For this method, employer and employee must both keep accurate records, including details of private and work-related costs.

Or, you can make a reasonable estimate of the costs likely to be incurred by your employee or group of employees.

Shareholder employees

Shareholder employees are able to ask their company to reimburse them for business travel using a private vehicle (i.e. one not owned by the company).

The reimbursement rates released by Inland Revenue can be used for these calculations.