Motor Vehicle Deductions Guide For motor vehicles acquired on or after 1 April 2011 Introduction Contents There are a number of different treatments in operation to obtain income tax deductions for motor vehicle expenses. It will depend on the type of business entity that operates the vehicle. This guide explains the fundamental rules surrounding motor vehicles and income tax deductions. This guide contains the following topics: Topic See page Changes flagged 2 Partnerships and sole traders 3 Vehicle log book 3 GST claims for sole traders, partnerships and trusts 5 Changes in use 6 GST on sale 8 Fringe benefit tax 9 Restricted private use by shareholder 11 Reimbursements for vehicle running costs 12 Options for the self employed 13 Motor Vehicle Deductions Guide Copyright 2011 1
Changes flagged Note: The Taxation (Business, Exchange of Information, and Remedial Matters) Bill has been passed and introduces a new option for claiming expenses for business travel for partnerships and sole traders from the 2017-2018 income tax year (i.e. 1 April 2017 for a 31 March balance date taxpayer). Under the proposed new rules, an option for using an extended per kilometre method as follows will be available for determining the amount to claim for an income tax year: fixed amount per kilometre for the first 5,000 kilometres of business travel, calculated with reference to a first tier industry rate published by the Inland Revenue, plus fixed amount per kilometre for kilometres of business travel in excess of the 5,000 kilometres, calculated with reference to a second tier industry rate published by the Inland Revenue (with no upper limit on kilometres for valid business travel). The first tier rate represents a rate determined by the Inland Revenue to provide for recovery of fixed costs and per kilometre costs, and the second tier rate provides for the recovery of per kilometre costs only. A 3 month representative logbook can still be used to determine the basis of business kilometres travelled for the year. Example The Inland Revenue have provided the following example to illustrate the working of the proposed new option. Mr Smith is a real estate agent who uses his personal car for business purposes. Mr Smith buys a new car and elects to use the per kilometre method to calculate his deductions when he files his tax return. Mr Smith has kept a log book for the first three months of the year, which shows a proportion of business to total kilometres of 0.55. Over the entire year Mr Smith has driven 30,000km. The rates that Inland Revenue has published are 75 cents per km for the first 10,000km and 25 cents for every km thereafter (these rates are indicative only). Mr Smith needs to calculate his deductions for each tier of rates, and then add them together. The formula to calculate his deductions for each tier is: Total kilometres travelled (to which the tier applies) x business proportion x tier rate Applying this formula, Mr Smith makes the following calculations: First tier: 10,000 km x 0.55 business use x $0.75/km = $4,125 Second tier: (30,000 total km 10,000km) x 0.55 business use x $0.25/km = $2,750 Adding the results for each tier together gives $4,125 + 2750 = $6,875. Therefore Mr Smith can claim deductions of $6,875. Motor Vehicle Deductions Guide Copyright 2011 2
Partnerships and sole traders MTG [ 10-710] Deductibility Motor vehicle expenses are generally deductible for income tax purposes, if the vehicle is used to help earn income for the business. If the vehicle is not used exclusively for the business (travelling to and from home is not a business related expense) then you are not able to claim 100% of the vehicle expenses. Vehicle log book MTG [ 10-710] What to record A log book can be used to record all business trips and then an actual business use percentage calculated for each period. Alternatively the log book can be kept for a three-month period every three years. If the use of the vehicle or the nature of the business changes over that three-year period, then another trial period of three months must be done. The log book needs to record the following: The type of vehicle The date and purpose of each business trip The start and finish reading from the vehicle s odometer From these records a percentage of business running can be determined. This percentage is then applied to the total running costs and depreciation of that vehicle to determine the amount of business related expenses that can be claimed for GST and income tax purposes. At the end of the three year period a new log book must be kept. An example of a vehicle log book is shown below. If no vehicle log book is kept If no vehicle log book is kept, 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. Technically, if a car has an element of private use and no log book is kept, no deduction for any GST on that vehicle s expenses can be claimed. Motor Vehicle Deductions Guide Copyright 2011 3
Example of vehicle log book Vehicle log book Vehicle Description: Ford Fairmont Vehicle Registration Number: EER 6952 Date Time Starting kms Ending kms Difference Origin/Destinations Reason 1 Feb 16 65423 10 Feb 16 9.08am 65423 65555 132 Office/Mr Hammer/Office Quote 5 Mar 16 4.30pm 67345 67349 4 Office/Bank/Office Banking 25 Mar 16 4.30pm 68216 68220 4 Office/Bank/Office Banking 5 Apr 16 8.30am 68250 68271 21 Office/Mrs Marsh/Office Delivery 14 Apr 16 6.00am 68554 68963 409 Office/Rotorua Industry Conference 17 Apr 16 5.00pm 68972 69382 410 Rotorua/Office Industry Conference 30 Apr 16 70125 Total distance travelled 980 Calculation of business use percentage: Business use = total business distance travelled 980 = 20.84% Percentage total distance travelled (70125 65423) Motor Vehicle Deductions Guide Copyright 2011 4
GST claims for sole traders, partnerships and trusts MTG [ 32-088] Intended use When a motor vehicle is purchased the amount of the GST claim for that purchase depends upon the intended percentage of use of the vehicle to make taxable supplies. When claiming GST on the initial acquisition of a vehicle, it is necessary to estimate the percentage of use that the vehicle will be used to make: Taxable supplies, GST exempt supplies*, and Personal use The GST input tax on the vehicle will then be apportioned based on those percentages, and an input tax deduction will be available for the percentage applicable to making taxable supplies. *A de minimus threshold applies so GST exempt supplies can be disregarded in calculating the percentages if the value of exempt supplies will not be more than the lesser of: $90,000, or 5% of the total consideration for all their taxable and exempt supplies for the period Initial cost Step 1 Identify the amount of input tax on the supply Step 2 Identify the percentage of intended use to make taxable supplies Step 3 Multiply input tax amount at Step 1 by percentage in Step 2 Step 4 Amount to claim is the result from Step 3 Note the normal requirements for claiming input tax still need to be satisfied; e.g. holding a tax invoice, payment has been made in the case of a person registered on the payments basis or for second-hand goods, and the associated person limitations. Motor Vehicle Deductions Guide Copyright 2011 5
Changes in use MTG [ 32-088] Adjustments required As the actual use for making taxable supplies can be different from the estimated intended use at acquisition, adjustments may be needed at the end of an adjustment period. Note: No further adjustments are required: For a vehicle that cost less than $5,000 no adjustment is needed in subsequent periods, or Where the intended use on acquisition versus actual use differs by less than 10% unless the adjustment is more than $1,000, or Where the actual use in the relevant adjustment period and the actual use in the previous adjustment period differs by less than 10% unless the adjustment is more than $1,000, or The value of exempt supplies will not be more than the lesser of: $90,000, or 5% of the total consideration for all their taxable and exempt supplies for the period There are limits on the number of adjustments periods for which an adjustment is made. Once the limit is reached, no further adjustments are made. The limits are: Maximum adjustment periods (based on GST exclusive cost) Cost $5,001 - $10,000-2 adjustment periods Cost $10,001 - $500,000-5 adjustment periods Cost $500,001 or more - 10 adjustments Where an adjustment is required, the adjustment is made at the end of each adjustment period. Adjustment periods The first adjustment period starts when the asset is acquired and ends at the person s choice either the: First balance date that falls after acquisition; or The balance date that falls at least 12 months subsequent to acquisition Subsequent adjustment periods start after the end of the previous adjustment period and end 12 months later. Calculating the adjustment for an adjustment period Adjustments are not simply an input/output adjustment based on the actual change in use between adjustment periods, but look at the average taxable vs. non-taxable use over the entire period of ownership since acquisition. See below for example calculation. Motor Vehicle Deductions Guide Copyright 2011 6
Example calculation for adjustment Car purchased at start of year for $23,000 including GST of $3,000. As the cost is more than $10,000, there will be a total of 5 adjustment periods (if the vehicle is kept that long). Estimated use is 70% business and 30% private Initial input tax claim Initial input tax claim is 70% of $3,000 = $2100 Subsequent adjustments 1. First adjustment period At the end of the first adjustment period 12 months later at balance date, actual business use is 55% (55% x 12/12) = 55% Percentage difference is 15% Output tax adjustment is 15% of $3,000 = $450 2. Second Adjustment period At the end of the second adjustment period 12 months later, when the vehicle has been owned for 24 months, the actual business use for that period is 65% Calculation is: (55% x 12/24) + (65% x 12/24) = 27.5 + 32.5 = 60% Percentage difference to previous adjustment is 5% The output tax adjustment would be $150 BUT No adjustment is required for this adjustment period as the percentage difference is less than 10% and the amount is not more than $1,000 3. Third Adjustment period The vehicle is sold in the following year for $10,000 including GST of $1,304.34, so there is no adjustment for this period. Instead, GST is payable on the full sale price, but because the full input tax deduction wasn t claimed, a further input tax adjustment on disposal is allowed. Motor Vehicle Deductions Guide Copyright 2011 7
GST on sale MTG [ 32-088] What can be claimed When the vehicle is eventually sold, GST is payable on the full sale price, but a further input tax deduction is allowed for the lesser of: 1. The total input tax charged on purchase of the vehicle, or 2. An amount calculated under the following formula: Tax fraction x consideration x (1 actual deduction/full input tax deduction) Continuing the example, the total input tax on purchase was $3,000, but only $1,650 in total has been claimed (initial claim of $2,100 less the $450 output tax adjustment in the first adjustment period and the nil adjustment in the second adjustment period), and the consideration for the sale is $10,000. The amount for 1 above is $3,000, but the amount from applying the formula in 2 is: 3/23 x 10,000 x (1 1650/3000) = $1,304.34 x (1 0.55) = 1,304.34 x 0.45 = $586.95 Therefore an amount of $586.95 is claimable as a further input tax adjustment against the GST payable on the sale of the vehicle. Motor Vehicle Deductions Guide Copyright 2011 8
Fringe benefit tax Note: The Taxation (Business, Exchange of Information, and Remedial Matters) Bill has been passed and introduces a new option for close companies providing motor vehicle to shareholder-employees to opt between paying fringe benefit tax (as detailed below) or claiming expenses for business travel using the motor vehicle expenditure rules (as detailed at the beginning of this guide). Under the proposed new rules, a close company can elect to apply the motor vehicle deduction rules and therefore not have pay FBT on the benefit provided to shareholder- employees. The election will apply only to new motor vehicle arrangements between close companies and shareholderemployees, and will continue to apply until the close company stops using the motor vehicle for business use or until the close company disposes of the motor vehicle. Where FBT applies MTG [ 21-167] If a motor vehicle is made available to an employee of a company (and this includes a shareholder employee), the company will have to pay fringe benefit tax. This applies whether in fact the vehicle is actually used for private purposes. Fringe benefit tax does not apply to vehicles that come within the definition of being work related vehicles. Fringe benefit tax also does not apply for certain emergency calls and some out of town travel. With respect to Look Through Companies (LTC), fringe benefit tax does not apply to working owners. Such benefits are treated as a distribution of profit to the working owner to the extent of the private use. Work related vehicles MTG [ 21-180] It is important to understand that not all business vehicles are workrelated vehicles for FBT purposes. In order to qualify as a work-related vehicle, all four of the following requirements must be met: The principle design of the vehicle cannot be for carrying passengers. This means that no sedan can qualify for this general exemption unless the sedan is a taxi. Vehicles that can qualify include utes (including extra cabs and double cabs), light pick-up trucks, vehicles that are permanently without rear seats such as vans, station wagons, hatchbacks, panel vans and four wheel drives. This will also apply if the rear seats have been welded down or made unusable because of a permanent fixture such as shelving. Taxis are also included, as are minibuses The company s name or logo must be permanently and prominently displayed on the exterior of the vehicle. Magnetic or removable signs are not acceptable The company must notify affected employees or shareholderemployees in writing that the only private use allowable is travel between home and work, or travel incidental to business travel. It is advisable that this notification be by way of letter, rather than just referring to it in an employment agreement The company must record checks (which must be quarterly) on each vehicle, to ensure that the restriction is being followed. For example, the company might check the log book and petrol purchases Motor Vehicle Deductions Guide Copyright 2011 9
FBT and private use If a work-related vehicle meets the four conditions above but is available for private use on certain days, such as Saturdays and Sundays, a partial exemption is available. If a vehicle is stored at a company shareholder s home which is also the company s premises, there must be no private use of the vehicle at all in order to qualify for the above exemption. If the shareholder s home is a secondary place of business there must be a private use restriction to qualify for the exemption. The company would have to show that the vehicle is not available for private use. Trucks and buses How is the FBT calculated? MTG [ 21-255] Vehicles with a gross laden weight of more than 3,500 kilograms are not subject to FBT. This tends to cover all larger trucks and buses. FBT is calculated based on either the vehicle s cost price (including GST), or on the vehicle s tax value A motor vehicle s tax value is its value for tax depreciation purposes at the beginning of the relevant tax or income year Once you have chosen to use either the cost or tax value option you must continue that option until either the vehicle is sold, the vehicle lease ceases or five years have passed If you are using the cost price option, FBT is calculated at 5% per quarter of the GST inclusive cost price of the motor vehicle, multiplied by 49.25%, being the fringe benefit tax If you are using the tax value option, FBT is calculated at 9% per quarter of the GST inclusive depreciated value of the motor vehicle, multiplied by 49.25% being the fringe benefit tax The FBT liability is reduced by the number of the days the vehicle was not available for private use or was exempt from FBT FBT is normally payable quarterly There is a provision for FBT to be paid at 43%. If the employee is on a salary of less than $70,000, this is an option that should be considered. It does involve reconciliation at the end of March each year. Consult your chartered accountant for further details on this option Motor Vehicle Deductions Guide Copyright 2011 10
Restricted private use by shareholder MTG [ 21-245] It may be possible to claim that a shareholder employee only has the vehicle available for private use on certain days. In order to claim that a shareholder-employee has restricted private use of a company vehicle, Inland Revenue considers that the company must: Show details of the restriction Confirm that the shareholder-employee is aware of the restriction Maintain a log book recording both business and private mileage on a daily basis or elect to maintain a three month test period to establish the use of a vehicle by an employee Produce a log book on request as evidence that the restriction has been complied with Motor Vehicle Deductions Guide Copyright 2011 11
Reimbursements for vehicle running costs MTG [ 3-445] Employees Inland Revenue has issued a standard rate to use when reimbursing an employee for travel, where the employee uses their own vehicle. The rate has been calculated taking into account a number of factors including: Running costs Depreciation An interest content for borrowing to buy a vehicle The standard rate is currently 73 cents per kilometre. This is irrespective of the type of car or the size of its engine. Inland Revenue has also introduced mileage rates for hybrid and electric cars: Hybrid - 73 cents per km Electric - 81 cents per km The use of the published IRD rate of 73 (or 81) cents per kilometre can be used for any number of kilometres in a year. In other parts of the legislation there is a 5,000km limit however not in relation to employee reimbursement. If, however, the employee is being reimbursed for a large number of kilometres, care does need to be taken that the amount of the reimbursement is not unreasonable when considered in relation to actual costs. Any excessive reimbursement can be deemed to be taxable income to the employee. From the 2018 income year, a 2 tiered mileage reimbursement rate not subject to a 5,000km limitation (referred to as the kilometre method will replace the single prescribed rate. At the time of printing these rates were not yet released by the IRD, but were expected shortly (refer Changes flagged at page 2). It is also possible to use published mileage rates from other organisations (for example, the AA). The rates must be a reasonable estimate of costs. Another alternative is to reimburse what the employer considers to be a reasonable estimate of actual expenditure incurred by the employee. Shareholder employees Shareholder employees are able to ask their company to reimburse them for business travel that has been done using a private vehicle (i.e. one not owned by the company). The reimbursement rates released by Inland Revenue can be used for these calculations. A shareholder employee now is treated the same as an ordinary employee and may be reimbursed under the same conditions as any other employee, i.e. with no 5,000km limit. Motor Vehicle Deductions Guide Copyright 2011 12
Options for the self employed MTG [ 3-445] A self-employed person may use one of three methods to calculate the proportion of business use of a motor vehicle, namely: Actual records A log book, or A mileage rate The Commissioner for Inland Revenue has set a mileage rate of 73 cents per kilometre that taxpayers may use to calculate the expenditure or loss relating to the business use on a motor vehicle. This rate applies from the beginning of your 2017-18 income year. For more information see the IRD website. This rate applies for: Self-employed taxpayers Up to a maximum of 5,000 kilometres of work-related travel each year Motor vehicles irrespective of engine size, or whether they are powered by petrol or diesel It does not apply for motor cycles. For the first time Inland Revenue has set mileage rates for hybrid and electric cars: Hybrid - 73 cents per km Electric - 81 cents per km Motor Vehicle Deductions Guide Copyright 2011 13
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