Motor Vehicle Deductions

Motor vehicle expenses are generally deductible for income tax purposes, if the vehicle is used to help earn income for the business.It is important to note that:- If you use the vehicle strictly for business, you can claim the full running costs, without making any adjustments- If you use the vehicle to travel from home to work, or for any personal travel, you will need to separate the running costs of your vehicle between business and private use

Where the motor vehicle deduction rules apply

– If you are self-employed, a sole trader or in a partnership and use your own vehicle in the business, you can claim the running costs for income tax

– Close companies providing motor vehicle to shareholder-employees can now elect to apply the motor vehicle deduction rules instead of paying FBT on the benefit provided to shareholder-employees

– If you’re reimbursing employees who use their own vehicles for work, you can use the principles of the motor vehicle deduction rules and Inland Revenue’s kilometre rates to calculate a reasonable amount of reimbursement

How to calculate business use

You can calculate the business proportion of your motor vehicle use by using actual costs, or a logbook.

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

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 need to show the reasons for business travel and the distances involved.

Vehicle logbook

You can use a logbook to record all business trips and then calculate an actual business use percentage for each period. Or 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 year period. At the end of the three year period, start a new logbook.

A logbook must record:

– The start and end date of the 90-day test period

– The vehicle’s odometer readings at the start and end of the test period

– The distance of each business journey

-The date of each business journey

-The reason for each business journey, and any other detail that IRD may ask you for.

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

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.

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 14,000kms.

The kilometre rate applies irrespective of engine size and does not apply to motorcycles.

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

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

Our Recommendation

Please contact us if you would like to talk through how the motor vehicle deduction rules would apply for your business.