Claiming Vehicle Expenses

A common query from those in business is ‘can I deduct my motor vehicle expenses for tax purposes?’ Basically, the tax issues involved depend on your tax status and who owns the vehicle. Chartered accountant Phil Gore from Pieter Holl and Associated Ltd gives techos some tips on claiming vehicle expenses.

If you are a sole trader, or a partner in a partnership, and you own a vehicle which you use for business purposes, you should be entitled to deduct the business portion of your vehicle expenses and depreciation. You can calculate the business portion of your vehicle expenses and depreciation using either the IRD mileage rate or a log book.

Mileage rate: You can use the mileage rate published by the IRD, currently 77c per kilometre, up to a maximum of 5,000 km of business travel per year. You must record the dates, the reasons for, and the distances of each business trip. If you use this method, you can’t deduct your actual expenses and depreciation, or claim the GST back on these expenses. For distances exceeding 5,000 km, you must claim the business portion of your actual expenses and depreciation.

Logbook (for full year): You must keep tax invoices and receipts and a logbook for the full year that records the dates, the reasons for, and the distances of each business trip, plus the total travel for the year. The percentage of business travel to your total travel is then applied to your vehicle expenses and depreciation e.g. business kms 350/total kms 1,000 = 35%.

Logbook (for test period): Alternatively, you can keep a logbook for a test period of 90 consecutive days every three years. You must still keep all your tax invoices and receipts. You must record in your logbook the odometer reading at the beginning and the end of the 90-day period. You can then apply the percentage of business travel to total travel for the test period to your vehicle expenses and depreciation for up to three years. A number of special rules apply. For example, the test period must be a period that represents the average business and non-business use of the vehicle. If your actual business use varies by 20% or more from the logbook percentage, the logbook ceases to apply and a new logbook should be maintained for 90 days.

If you don’t keep sufficient records of your business use, IRD may disallow your claim completely or limit it to a maximum of 25% of your vehicle expenses and depreciation.

Please note business travel does not generally include travel between home and work. However, you may be able to treat this travel as business use if your work is itinerant in nature and you work from home.

If your business is a company then there are two scenarios.

First is if the company owns the vehicle. So if you provide your services through a loan-out company, your company owns the vehicle and it is available for your private use, the company will be liable for fringe benefit tax (FBT) on the ‘taxable value’ of the vehicle, unless an exemption applies. In this situation, you don’t need to keep a logbook, the FBT, vehicle expenses and depreciation incurred by the company are tax-deductible and it can claim back the GST it pays on these expenses. Therefore, there can be advantages in a company owning a vehicle, rather than you owning it personally, particularly if it has a low taxable value and private usage is high.

Second is if the vehicle being used for business purposes is owned by an employee. Employees and shareholder-employees can’t deduct their employment-related expenses for tax purposes. However, an employer can reimburse its employees for the business portion of their vehicle expenses. This reimbursement may be calculated using one of the following three options:

Actual business expenses: Employees need to keep tax invoices and receipts and a logbook for the full year that records the dates, the reasons for, and the distances of each business trip, plus the total travel for the year.

IRD mileage rates: Employees can be reimbursed using the IRD mileage rate of 77c per km. The 5,000 km limitation referred to above doesn’t apply to employee or shareholder-employee reimbursements. However, we note the IRD mileage rate can only be used if it represents a reasonable estimate of the employee’s actual business expenses.

Approved mileage rates: A reasonable estimate of the business expenses based on a mileage rate published by a reputable source e.g. the Automobile Association.

If employees use either of the IRD and/or approved mileage rate alternatives, they must record the dates, the reasons for, and the distances of each business trip. These reimbursements are deductible to the company and tax-free to the employee, provided the amounts reimbursed don’t exceed the employees’ actual or reasonably estimated business costs.

We recommend you contact your financial adviser or contact us on 09 925 7630 or phil.gore@phaal.co.nz prior to purchasing any new business vehicles or if you have any queries regarding vehicle expenses.