Working out your Motor Vehicle Costs

The scenarios around claiming motor vehicle costs for small business is perhaps one of the most common questions we get asked.  It’s not all that surprising when you consider the multitude of options available in conjunction with the implications of getting it wrong.  Getting it wrong can include not claiming these costs as a valid business expense or being hit with an unexpected tax bill for taking the wrong approach.  At the bottom of this article is a handy diagram that will also help you wade through the options available.

The options available can be distilled into the following 4 options:

1. Per km rate reimbursement

If you own the vehicle personally, you can be reimbursed for business use on a per km rate.  The IRD have brought out a new km rate for  for the 2017/18 years and future years. The previous restriction of 5,000km for sole traders has been removed but

  • this method reduces the claim to 3,500kms where a full logbook has not kept
  • allow for unlimited kms to be claimed if a full logbook is kept using the rates below

A full logbook means keeping track of your initial Odometer reading and then recording any business use kilometres and taking the odometer reading at the end of the financial year.  These rates take into account not only the petrol costs associated with running a vehicle but also wear and tear and expected maintenance costs.

Vehicle Type First 14,000 kms After 14,000 kms
Petrol or diesel 76 cents 26 cents
Petrol hybrid 76 cents 18 cents
Electric 76 cents 9 cents

Business Cost = Km rate X Kms travelled X Business proportion

  • KM rate – is a rate from the table above
  • KMs travelled = total number of kms travelled for business AND personal
  • Business Proportion = Actual costs or logbook
Pros
  • For less than 3,500km then easy to track and administer
  • Reimbursement is probably higher for a well maintained car (particularly older cars that would have less depreciation)
Cons
  • Reimbursement may be less than other methods particularly in years of high repairs/maintenance costs
  • Once this method is chosen you can’t change out of it for the life of ownership of the vehicle

2. Private Ownership – Claim % of Costs

Maintain a vehicle log book for 3 months to establish the business usage of a private vehicle will determine what % of actual costs can be claimed for income tax purposes. The business % established can be used for 3 years after this date.
In terms of vehicle log books there are the obvious paper-based log books which can be purchased from a local stationary outlet, however, there are also a number of apps for mobile phone which capture your trips when they connect to your vehicles Bluetooth, reducing the amount of administration that is otherwise required.

Pros
  • Tax deductions reflect actual business usage
  • Not too hard to administer
Cons
  • No GST claim on purchase of vehicle that would otherwise exist if purchased in a business that is GST registered
  • Need to maintain a log book for at least 3 months to establish benchmark % valid for 3 years thereafter

 

3. Business Ownership – Claim % of Costs

Again in this scenario, a vehicle log book is maintained. The difference in the business ownership scenario is that a claim for GST purposes can be made on the purchase of the vehicle. However, an increased level of compliance occurs with GST calculations if down the track the % of business usage changes.

Pros
  • Tax deductions to reflect actual business usage
  • Not too hard to administer
  • GST claimed on purchase of vehicle based on business %
Cons
  • GST to return on disposal of vehicle in future years based on sale price
  • Need to maintain a log book for at least 3 months to establish benchmark %, valid for 3 years thereafter
  • Complex GST adjustment calculations if business % changes in the future.

4. Company Ownership – FBT

If a vehicle is owned in a company, the company is not a close company (5 or fewer person shareholders) and you don’t want to maintain a log book then it is likely the vehicle will be subject to the Fringe Benefit Tax (FBT) rules.  This is a tax levied on the cost value of the vehicle and based on it’s “availability” for private use. On the flip side, all costs associated with the vehicle are deductible. A cost-benefit analysis needs to be considered in conjunction with a number of other matters with this method and as such should be done in conjunction with discussions with your accountant.

There are a number of ways to minimise FBT if you meet certain criteria.
These are:

  1. Putting in place restrictive use arrangement for owners/employees
  2. Meeting the work vehicle exemptions (which involves sign-writing of vehicle in conjunction with a few other criteria)

These options to minimise, require a level of administration in themselves and aren’t a case of set and forget.

Pros
  • Maximises deductions particularly where there may be a high personal usage
Cons
  • Only beneficial in a limited set of circumstances
  • FBT forms to be filed or account for through the financial statements