When running a business in New Zealand, understanding how to claim vehicle expenses effectively can help reduce your tax bill. However, the methods and rules differ depending on whether you operate as a sole trader or through a company. Here's a simplified breakdown of the methodologies and approaches to help you make informed decisions.
Expense Claims for Sole Traders
As a sole trader, the vehicle you use for business purposes might also be used for personal reasons. The Inland Revenue Department (IRD) provides several options to claim these expenses accurately:
The Kilometre Rate Method
Ideal for those who use their vehicle for business occasionally.
You need to keep a logbook for at least 90 consecutive days to determine the percentage of business use.
IRD publishes annual kilometre rates, which we then apply to the business portion of your travel. For example, if you drive 10,000 km in a year and 40% is for business, you’d claim 4,000 km at the IRD’s specified rate.
Pros: Simple and eliminates the need for detailed expense tracking. Best suited for those who use their vehicle predominantly for personal use with occasional business trips.
Cons: May not cover costs if you use your vehicle extensively for business. You can not claim vehicle depreciation using this method.
Note: You must record your vehicles odometer reading at 1st April and then one year later on 31st March (every year).
Note: The logbook can be used for 3-years provided variance of business use is less than 20% of the logbook representation. It should be formally updated at least every three years.
Actual Cost Method
Best suited for those who use their vehicle extensively for business.
Requires maintaining records of all vehicle-related expenses, such as fuel, maintenance, insurance, and depreciation.
Similar to the kilometre rate method, you’ll need a logbook to establish the proportion of business versus personal use. This percentage is then applied to the total vehicle expenses
Pros: Allows you to claim the exact business costs incurred.
Cons: Requires detailed and ongoing record-keeping.
Note: In the absence of a logbook (or actual records) You can only claim a maximum of 25% as a proportion of business use of a motor vehicle, provided that such a % can be justified.
Logbook Exemptions for 100% Business Use
If the vehicle is exclusively used for business,
A 90-day log book is recommended so that you can show 100% business use.
All expenses can be claimed, but you’ll need proof that there’s no personal use (e.g. having a second vehicle for personal purposes).
Vehicle Expense Claims for Companies
For companies, vehicles are typically owned by the business, and the rules differ significantly:
Fringe Benefit Tax (FBT) Implications.
When a company provides a vehicle to an employee or shareholder-employee for private use, it must account for FBT. The FBT is calculated based on the value of the benefit provided, which includes the availability of the vehicle for private use. Companies must maintain records to support their FBT calculations, including any private use restrictions. Companies must calculate and pay Fringe Benefit Tax (FBT) on the private use of business vehicles, this includes calculating GST on the fringe benefit provided.
To avoid or limit FBT, companies can restrict personal use through policies and keep records demonstrating compliance.
Recent proposals have aimed to simplify the process for close companies (5 or fewer natural persons or Trustees as shareholders) by allowing them to opt out of the FBT regime for motor vehicles and instead use the same apportionment methods available to sole traders and partnerships. This includes using actual records, logbook records, or mileage rates to determine the business use of the vehicle. This option is intended to reduce compliance costs and align the treatment of motor vehicles across different business structures.
Considerations: Requires careful calculation of FBT and understanding of exemptions and reductions.
Actual Cost Claims
Similar to sole traders, companies can claim all vehicle-related costs if the vehicle is strictly for business use.
Lease vs. Purchase
Leased Vehicles: Lease payments are deductible, but FBT applies if personal use occurs.
Purchased Vehicles: Depreciation and interest on loans (if financed) can be claimed as business expenses.
Consider cash flow and long-term costs when deciding between leasing and purchasing.
Employee Reimbursements
If employees use their own vehicles for business, the company can reimburse them using the IRD’s kilometre rates or other agreed-upon rates. Such reimbursements are deductible business expenses.
Tips for Accurate Record-Keeping
Maintain a Logbook: Whether you’re a sole trader or a company, a logbook is essential for mixed-use vehicles. Record every trip’s purpose, distance, and date.
Store Receipts: Keep all receipts for fuel, maintenance, and other vehicle-related expenses.
Use Technology: Consider apps or software to track mileage and expenses automatically.
Review Annually: Business use percentages and expense methods may change over time, so review your approach yearly to ensure compliance and maximise claims
Conclusion
Choosing the right method and approach to claim vehicle expenses can significantly impact your business’s financial health and tax obligations.
Sole traders may prefer the simplicity of the kilometre rate method or the precision of actual costs, while companies must navigate FBT rules and decide between leasing or purchasing. Accurate record-keeping is vital regardless of your business structure. By understanding the available options and maintaining accurate records, you can optimise your vehicle expense claims and ensure compliance with New Zealand's tax regulations.
For personalised advice and assistance with your vehicle expense claims, feel free to contact our team. We are here to help you navigate the complexities of tax compliance and maximise your business's financial potential.
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