PKF Francis Aickin Limited, Far North, New Zealand
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19 Jul 2018
IRD have recently released a new statement on deductions for business use of motor vehicle for sole traders, partnership and eligible companies. It applies to vehicles which are used for both private and business use. The second part of the statement covers the tax treatment of reimbursements paid to employees for the use of their private vehicles.
Part 1 – Business Vehicles - is effective for the 2017/18 tax year onwards. There are two different calculation methods: the cost method and the kilometre rate method. The election to use a particular method is irrevocable and will continue to apply to that vehicle until it is sold. So, if you have already filed your 2017/18 tax return, whatever method you used to determine your vehicle expense claim is set in concrete.
Under either method a logbook must be maintained for at least 3 months in a three year period to determine the percentage business use. In absence of a logbook, claims are limited to maximum of 25% business use, assuming such a percentage can be justified,
The cost method, which is the default, uses actual costs incurred multiplied by the percentage business use. As actual invoices/dockets are kept, a GST registered business can claim GST on the business portion of any eligible expenses.
The new kilometre rate has changed from the one set rate to a two tier rate. The first tier is to cover the both fixed costs (insurance, registrations, interest, depreciation) and running costs (fuel, repairs, road user charges). and is limited to the first 14,000 km per year of total running. Above this the second tier applies, which covers just the running costs and varies according to the type of engine.
If you elect to use the kilometre rate you must record your odometer reading at balance date so you can determine the total kilometres travelled (business and non-business) in the tax year.
The Tier 1 rate is 76c/km. The Tier 2 rate for petrol or diesel vehicles is 26c/km, with 18c/km for petrol hybrid and 9c/km for electric.
Example – a petrol vehicle runs 20,000km per year of which 10,000km is business related and the taxpayer elects to use the new km rate method:
Total kms run are greater than 14,000kms. Business usage is 50%. So Tier 1 claim is $5,320 (14,000 x 50% x $0.76).
Tier 2 is the excess kms. i.e. 3,000 (10,000-7,000) x $0.26 giving $780. A total claim of $6,100.
The 5,000 km limit to deductions no longer applies, which is good news to business owners in the Far North who usually travel long distances. Under the old rules the claim would have been $3,650. (5,000 x $0.73).
Part 2 – Employee Reimbursements - is effective for the 2018/19 tax year onward. The employer can still use the actual expenditure basis for reimbursement but the kilometre rate is likely to be more commonly used.
If an employee maintains a logbook, including total kms run during the year, the full two tier system can be used.
If however, total annual mileage is not recorded, only the first 3,500 business kms are paid at the Tier 1 rate with the balance for the year paid at the Tier 2 rates.
The motor vehicle rules are complex, and more detail is included in the IRD operational statement, which you can read here - IRD STATEMENT RE RV RATES
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