Claiming the costs of running your vehicle in your business is what everybody wants to do – and simultaneously one of the trickiest calculations in your accounts! The IRD are trying to minimise your claim and Beany is trying to make sure it represents all the costs of your business use. So here is an excellent and comprehensive blog from Sheree McDonald, one of our senior accountants, which covers all the bases.
What can you Claim?
If you own a vehicle that is used in your business, you can claim a portion of the vehicle running costs against your income.
Running costs include petrol, repairs & maintenance (including tyres), insurance, road user charges and registration.
The rules depend on whether you operate as a sole trader, partnership or a company.
If you are a Sole Trader or a Partnership
If you are a sole trader or partnership and your vehicle is only used for business you can claim the full running costs without making any adjustments.
One catch to watch out for with determining business use is that travel between work and home is not classed as business use. This can change the resulting business to private use percentage substantially.
If not all your travel is business use then you will need to choose between these two different methods for calculating these vehicle costs:
This method is based on keeping a record of all actual costs incurred. You have two options under this method:
1/ Use a logbook – this is a log of all travel for a three-month period (required to be updated every three years). This includes the distance, date and reason for the trip, and you can use the difference between the odometer reading at the start and end of the three months to determine the percentage of business use. You can download a free logbook template from the IRD website (https://www.ird.govt.nz/tool-for-business/what-next/expenses/expenses-index.html)
2/ Claim up to 25% of all vehicle expenses – you can claim up to 25% of the vehicle running costs as a business expense by default, however, you could still be asked the justify the percentage claimed.
The claimable cost is calculated by actual costs x business portion.
Kilometre Rate Method
This used to be fairly straightforward with a flat rate per km travelled but that was too easy so the IRD amended that!
From the 2017/2018 year, there is a two-tier kilometre rate that can be applied to work out vehicle costs to be claimed. You will need to keep a record of the total kilometres travel to determine your business use percentage (as done above with the other methods).
First tier – this rate if 76c/km and covers both fixed and running costs for all vehicles types. This rate is limited to the first 14,000km per year.
Second tier – this rate varies depending on the type of vehicle (petrol, diesel, hybrid or electric) and covers running costs only. This is for additional kilometres travelled over $14,000.
The claimable cost is calculated for each tier by kilometre rate x kilometres travelled x business portion.
Please note, if no logbook is kept, the use of tier one rates below is limited to the first 3,500kms.
Prior to 2017/2018, you can only claim up to 5,000km travelled based on the IRD mileage rate for the applicable year.
If you are working within a Company Structure
The IRD rules have changed regarding companies from the 2017/2018 year. Previously, if a company owned a car, all expenses could be claimed without any private use adjustment. However, the company was required to pay Fringe Benefit Tax (FBT) if the vehicle was available for employees or shareholder-employees to use privately. GST is also required to be paid on this.
The new rules allow a company to use the same methods above for a sole trader or partnership if it is a close company and only one or two motor vehicles are available to shareholder-employees for their private use.
A close company is essentially most family owned companies in NZ, technically it means 5 or fewer shareholders.
Close companies can elect to use either the cost or kilometre rate method explained above instead of paying FBT, however, this only applies to new vehicles acquired during the 2017/2018 year. Once a method is elected, the company will continue to use it until the vehicle is disposed or ceases being used for business use.
If the above criteria doesn’t apply to you, you will still fall under the FBT rules. However, if you do fall under the FBT rules, talk to us because we have some ways to correctly account for this without having the fuss of FBT returns.
What to do with the GST when you buy a Vehicle
If the vehicle is purchased by your business, you can claim GST back on the purchase price of the vehicle. Please note, the amount of the GST claim must correspond with the portion of the assets use that is intended for business purposes. You may be required to adjust the GST claimed if the actual business use if different to the original GST claim.
GST can be claimed under the costs method for annual running costs, however, GST cannot be claimed on these costs under the kilometre rate method.
Don’t worry if you’re feeling confused and wondering what this means for you, it’s our job at the end of the year to check the vehicle claim is correct and you can always pick up the phone at any time and call us on 0800 755 333 and talk to our friendly support team or send in an email to email@example.com!