Motor vehicle expense claims by Dale Adamson
10 Nov 2016
Claims for vehicle expenses for income tax and GST are a complicated area, and not fully understood by many taxpayers. In practice, many taxpayers wouldn’t survive a strict IRD audit unscathed, so what follows is an analysis of those rules.
For any expense to be claimable it must meet the “general permission” of being incurred in deriving income or carrying on a business for the purpose of derving income. The legislation also states business use, for a vehicle and for a person, means travel undertaken by the vehicle wholly in deriving the person’s income. It excludes travel from home to work (with some exceptions) and any other travel that confers a private benefit.
So put simply, vehicle expenses can only be claimed as a tax deduction to the extent they are business related. Under the existing rules for Sole Traders, Partnerships & Look Through Companies (LTCs), there are four options for calculation:
- Actual records using a perpetual logbook to split actual expenditure according to business use.
- Logbook kept for 3 months every 3 years to calculate business percentage of actual expenditure. The 3 months should be representative of the normal usage pattern. If there is a business use reduction of more than than 20% in any month, a new 3 month logbook needs to be started.
- Mileage Rate for up to a maximum 5000km of business travel per taxpayer per year. The rate/km is prescribed by the IRD. This rate covers both the capital cost of the vehicle and the running expenses.
- Default method which allows for the lesser of a 25% claim or the portion of actual business use.
For all of the options, the taxpayer needs to be able to justify the claim, so some sort of record of business running needs to be maintained. If a vehicle is used 100% for business, all expenses can be claimed. However there needs to be another vehicle available for private running to justify the full claim.
An important point to note, is that Income Tax and GST legislation differ. Subject to the normal GST requirements, GST is claimable under options 1 and 2. However, GST is not claimable under options 3 and 4.
Vehicles in Companies (excluding LTCs) present further complications. As a company can’t have private use, fringe benefit tax (FBT) applies to any private benefit. There are two sets of rules, based on whether the vehicle is mainly designed for carrying passengers (cars, SUVs) or not (utes,double cabs, trucks). Car type vehicles are subject to FBT on the days they are available for private use, whereas “work related vehicles” are only subject to FBT when they are used for private use.
As well as being the correct type, a work related vehicle must have the business name/logo permanently and prominently displayed. Any private use must be incidental (e.g. work/home). We suggest a letter prohibiting private use, which should also be monitored regularly. It is possible for a modified car type vehicle to be classed as a work related vehicle. E.g. a station wagon with its rear seat removed or permanently fastened down.
There is new legislation in the pipeline with a proposed effective date of 1 April 2017. One of the proposed changes affects the mileage rate, with the 5000km limit being removed. It will be a 2 tier system with the first tier including fixed costs per km and the second a per km cost only. Total kilometres will need to be recorded, not just business, so that the fixed costs are spread over both the business and private running.
Another proposal is that shareholder-employees of a closely owned company, where the only fringe benefit provided is one or two vehicles, will be able to use the same rules as partnerships. i.e. they just claim the business use portion in the company and don’t have to account for FBT. GST claims, in these cases, would also follow the partnership rules.
As vehicle expense claims are a complicated area and each taxpayer’s circumstances are different, advice should be sought from your tax adviser to ensure that the most tax efficient treatment is applied.