Many businesses need to get their employees around the place to do their jobs. This often means that they need to either have company motor vehicles for their employees to use, or reimburse their employees for the use of their personal cars. Much of the motor vehicle expense claim methods have undergone some changes in recent years so its important to keep up with what you can now claim. In this article we’ll be taking a quick look at the three main options you have available; personal vehicle reimbursed, company car and third party motor vehicles.
Personally Owned Motor Vehicles
If you or your employees are required to use your personal vehicles for business, you can pay a mileage rate reimbursement.
The IRD has recently overhauled the mileage rate calculation method and pay-out per kilometer, you can read more from them here. Previously, you could only claim up to 5,000km of travel per year at their annually adjusted rate per km with minimal records. Now you can claim an unlimited number of kilometers at variable rates, as long as you keep records to back up your mileage claims.
No matter what your vehicle type, you can now claim up to 14,000km of business travel at
|Vehicle Type||First 14,000 kms||Over 14,000 kms|
|Petrol or Diesel||$0.76 per km||$0.26 per km|
|Hybrid||$0.76 per km||$0.18 per km|
|Electric||$0.76 per km||$0.09 per km|
Record Keeping Requirements
You must keep a record of the number of kilometers traveled for business in order to make accurate reimbursements. There are many apps and fleet management software solutions available that allow you to do this effortlessly.
If you do not keep accurate or reliable records of business use, then the reimbursements permitted are severly limited.
The $0.76/km rate is only allowed for the first 3,500km of undocumented travel. Beyond 3,500km the reimbursement rates are limited to the tier two rates (e.g. $0.26 for a petrol or diesel). If you drive a lot for work it pays to keep good records.
Steve uses his personal diesel ute for work. He drives 15,000km per year for work. If he keeps accurate records of his business trips, he claims the first 14,000km at $0.76/km and and the final 1,000km at $0.26/km. This is a total reimbursement of $10,900. However, if no proper records are kept to back-up the claims, then the rates drop. He can claim the first $3,500km at $0.76 and the final 11,500km at $0.26/km for a total claim of $5,650. Bad record keeping almost halves his reimbursement and leaves him $5,250 out of pocket.
Your Company Owned Motor Vehicles
If your company owns the vehicle you can claim deductions for its running costs. These costs includes things such as fuel, road user charges, repairs and maintenance, and insurance.
Logbook-Based Motor Vehicle Expense Apportionment
If the vehicle is used by you, the business owner/shareholder, then you can apportion the expenses based on your usage. This means that you keep a logbook for three months to track all of your business versus personal trips. This will allow you to calculate the proportion of the vehicle usage that is business related. This business portion of the motor vehicle expenses is the deductible portion. This logbook determination remain in place for up to three years, or until your usage fluctuates by 20% or more.
You drive 10,000km over the three months you are keeping the logbook. 8,000km was for business related travel and 2,000km was for personal travel. 80% of your motor vehicle expenses can be claimed as a deduction against your business. If the business is paying all of the running costs, your 20% personal portion can be split off through your shareholder current account. This essentially treats this benefit you get the same way your cash drawings are treated.
As the vehicle is owned by the company, any depreciation of the vehicle as an asset will also have to be adjusted. Therefore, with the vehicle in the example above, only 80% of the depreciation is deductible. Likewise, with a financed or leased vehicle there will be adjustment to make. The interest expense on any finance arrangement and the payments on any operating lease will have to be adjusted. The personal portion of the depreciation, interest and lease payments will be treated in the same way as the other personal portions.
If you have employees using the company vehicles, the shareholder account apportionment method will be inappropriate.
Tax Adjustment for Employee Use of Company Motor Vehicles
As with an owner used vehicle, you can claim for the business related motor vehicle expenses when your employees use the company car.
However, if the company car is also available for personal use by the employee, you will need to pay tax on that added benefit. This tax is called Fringe Benefit Tax (FBT). This is because the use of the motor vehicle is an added (or fringe) benefit to the employee of their employment. The purpose of FBT is to treat this added benefit as if it were a salary. FBT is added to the net value of the benefit provided, usually at a rate of 49.25%. This might seem like an extremely high tax rate but it is designed so that the added tax liability equates to approximately 33% of the gross fringe benefit.
You provide a vehicle to be used by an employee. The employee is allowed to use the vehicle personally. The calculated value of this added personal benefit is $10,000. At 49.25%, the FBT on this benefit is $4,925. This makes the total gross benefit $14,925. The added tax portion is 32.998% of this gross. This means that the tax is therefore roughly equivalent to the income tax payable if that non-cash vehicle benefit had otherwise been paid in cash as a salary.
There will also be GST adjustments to make along with the FBT compliance. This is a lot of added tax to take into account when considering how to structure your vehicle policies and arrangements. Ensure that you have properly discussed the matter with your tax or business advisor.
Proper compliance does have its perks. You can claim 100% of the motor vehicle expenses when you are properly complying with the FBT regime. These expense claims should be enough to offset the added GST and FBT taxes through GST claims and Income Tax deductions. If they aren’t, you will need to consider the benefit of the vehicle to the business and the other options you may have to reduce or eliminate the added burdens.
Check Out Our Definitive Guide to FBT Compliance
FBT can be a complicated issue and it’s important that you get it right to avoid running foul of the IRD. This is a key area that they are focusing on as kiwi businesses love a company car but often skip over proper tax compliance with those motor vehicles. We will publish a more definitive guide to FBT compliance at a future date so keep an eye out or subscribe to our newsletter, MBP Business Briefing, to keep up to date.
You Don’t Own Any Motor Vehicles
For many businesses, owning vehicles and accounting for the added usage, benefits and taxes is just too much of a burden and distracts them from what their core focus should be. These businesses are instead turning to third parties like Uber or corporate cab companies. This is a growing trend, especially in larger cities. Services like Uber for Business are changing the way that teams travel, offering affordability, convenience and professionalism that is often hard to imitate with a dedicated company car.
Since you are only paying for what you use, this can be a far more affordable option, especially for larger teams or ones that don’t travel regularly. Not only do you have access to a car whenever you need it but you get picked up at the front of the office and never have to worry about parking. Overall, less time and money wasted on non-value adding activities and more timely and reliable service for both employees and your customers or clients.
This has been a really quick (as quick as it could be) run through of these three options. There are some other options and methods so please get professional advice, preferably before you make any big and potentially very expensive decisions.
This advice is general in nature and should not be relied on as a recommendation. Every situation is unique and requires tailored advice. Get in touch for a free consultation by emailing firstname.lastname@example.org or call us free on 0800 86 85 86.