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Motor Vehicles and FBT

Motor Vehicles and FBT Overview

As a business expense it is permitted to claim motor vehicle running costs as a tax deduction under the Income Tax Act.

In order to determine which method applies to each situation, one must determine the structure of the business and ownership of the motor vehicle.

A 100% business-related use is the simplest form of use. All business expenses related to motor vehicles can be reclassified as operating expenses in this case. Depreciation can be claimed if the business is operated by a single trader or partnership. As long as the company owns the vehicle, depreciation can also be claimed by the company if it is a limited company. You will need to have another vehicle available for private use if a vehicle is 100% for business use.

 

Fringe Benefit Tax

There may be a case where a business owner owns a vehicle that is either a station wagon or a sedan, and that vehicle is used solely for private purposes, then Fringe Benefit Tax (FBT) could be payable. The fact that such a vehicle can still be used for private purposes is still noted if it is taken home but not used.

FBT, however, will not apply to home-based businesses unless their family vehicle is the only one available. The recommendation is that one vehicle should be used for business purposes and another should be used for personal purposes. Ideally, if the workplace is not at home, the vehicle should also be parked at the workplace, so that no FBT will need to be paid.

 

Calculations

The amount of business use of a motor vehicle in order to deduct a portion of the vehicle running costs as a business expense should be calculated where a vehicle is used for both business and personal use.

Logbooks are recommended for this purpose. This logbook serves both as verification and as a means by which calculations can be made.

There are three ways to do this. The IRD publishes the kilometer rates after the end of each tax year on 31 March.

  1. Logbook

Keeping a logbook can help you determine how much time you spend using the vehicle for business. You can deduct your vehicle's depreciation and costs for business use using IRD’s kilometer rates.

GST is not considered when self-employed people use kilometer rates. Depreciation is included in kilometer rates. You will not be able to claim a separate deduction for depreciation or recover any depreciation for the vehicle by using this method.

Either of these applies when a logbook is not kept:

  • For a vehicle running expense claim, the claimer will only be able to claim 25% of the running cost of the vehicle. Please note that you will need to prove why you are claiming the percentage.
  • Before the 2018 income year, the claim is limited to 5,000 kilometers if the kilometre rates are used.

The cost of car parking is deductible as much as other vehicle expenses, provided that these costs contribute to determining the assessable income.

2.     Mileage Rate Method

The allowance for business-related expenses of a vehicle can be calculated by using kilometre rates. Until IRD provides the new rate, the current reimbursement rate applies.

For the first 14,000 total kilometers, use Tier One rates and Tier Two rates thereafter. Tier 2 rates are determined by the type of vehicle.

Rates

Using the Tier 1 and Tier 2 rates

The Tier 1 rate is a combination of your vehicle's fixed and running costs. Use it for the business portion of the first 14,000 kilometres travelled by the vehicle in a year. This includes private use travel.

The Tier 2 rate is for running costs only. Use it for the business portion of any travel over 14,000 kilometres in a year.

3.     Actual Expenditure

For the actual expenditure method, you must keep a logbook for the entire calendar year in order to record the required details in the "Logbook Method.". Motor vehicle running costs receipts must also be kept for the whole year. The motor vehicle running costs can be claimed as a business expense at the end of the year by applying the percentage of business usage from the logbook to the receipts.

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