EXPENSES â˘Â 4 MARCH 2021 ⢠6 MIN READ
What motor vehicle expenses can I claim for my business?
SECTIONS
Motor vehicles for sole traders and partnerships
Motor vehicles for company structures
GST, loans and leasing FAQs
Is it smarter to borrow to purchase a vehicle, or lease instead?
Who are Beany?
Hereâs the deal. Everyone is trying to make the most of their ability to record their personal vehicle use as a business expense, and in response, the IRD is doing their best to minimise the eligible criteria.â
When youâre a client of ours, you wonât have to worry too much â we make sure you always claim the right amount. But regardless, letâs explore how the system works.â
Motor vehicles for sole traders and partnerships
If your vehicle is used solely for business purposes, all motor vehicle expenses (fuel, maintenance, servicing, insurance, WOFs, replacement tyres, and similar) can be claimed as expenses.â
But business purposes doesnât include school drop-offs, going to the supermarket, or even travelling between home and work. The only possible exception here is when your home also acts as your office.â
When a sole trader or partnership chooses to use a business vehicle privately, too, the costs need to be separated.â
One reporting option is keeping a logbook
A logbook records all travel over 90 days. It notes the distance, date and reason for each trip. This information can then be used to understand the proportion of use allocated to the business, and we can choose one of two methods:â
- For the first 14,000km travelled, claim $0.82 per business kilometre. A lower rate gets applied to additional kilometres (and is different for diesel, petrol hybrid and electric cars)
- Apply the percentage of business travel to all vehicle expenses incurred. I.e if itâs 70% of the time, 70% of a WOF or a service can be claimed as a business expense
Assuming your travel habits donât change significantly, your logbook can be valid for up to three years.â
Thereâs also some good news about logbooks. While you can still find a template on the IRDâs website, you can digitise the whole process with an app to save time. You may want to check out Driversnote and this review of other great apps for small businesses.â
No logbook
If you donât intend to keep a logbook, you have two more options.â
1. Claim up to 25% of all vehicle expenses. The IRD may ask you to justify whichever percentage you opt forâ
2. Claim $0.82 per kilometre for up to 3,500km, and then a lower rate for additional kilometres. Youâll still need to track your business travel, but without as much detail as in a logbookâ
Motor vehicles for company structures
In addition to the methods mentioned above, companies have another option. Hereâs how the âMotor Vehicle Reimbursementâ (also known as âFBT Reimbursementâ) works.â
First off, if the vehicle was purchased from a third party, it is recorded at its purchase price. However, if purchased from a related party (yourself as shareholder, your mother, aunt, mate), then you need to work out the market value. The easiest way is to look in Auto Trader or TradeMe Motors for a vehicle with the same year, make and model, and similar condition. We can use the advertised price as its market value.â
If a shareholder decides to use the vehicle for private use, this benefit theyâre receiving must be recorded in the companyâs financial statements. We call it a benefit that the shareholder is receiving, because they donât need to purchase a car, and the company is paying for their vehicle expenses.â
The company must be reimbursed for this benefit.
We calculate the reimbursement based on the vehicleâs value when it was brought into the company, and the number of days itâs available for private use. The reimbursement is then recorded as a separate income line in the companyâs financial statements (itâs considered income because the company is receiving compensation from the shareholder).â
Itâs important to understand the concept of availability. Shareholders reimburse the company for any day that the vehicle is available to them â which includes when it sits in their driveways.â
Exceptions to this rule are:
- A vehicle serving a specific function, which cannot take passengers
- The vehicle showing prominent branding which canât easily be removed
- A shareholder having a second or third vehicle to use privately
- The company says, in writing, that the vehicle cannot be used privately
What makes FBT Reimbursement optimal?
- The company doesnât need to file FBT returns to the IRD
- No cash changes hands. The amount is calculated and then adjusted when itâs time to prepare financial statements
An important note is that FBT Reimbursement doesnât apply to non-shareholder employees. Their benefit falls under the Fringe Benefits Tax (FBT) regime and is accounted for separately.â
GST, loans and leasing FAQs
Can I claim GST on a personal vehicle that I use for business?
You can, indeed.â
- If youâre a sole trader, you can record the vehicle as a business asset. GST can be claimed on its market value at the time the vehicle is introduced to the business
- Your company can purchase your personal vehicle at market value, and the GST is claimed when transferred.
No cash needs to change hands. You can just let your accountant or our support team know, and weâll enter the information into Xero for your next GST return. Just be aware that your accountant will make an adjustment for the private portion of expenses at the end of the year.â
How much GST can I claim if I borrow to buy a vehicle?
You can claim all of it up-front. In fact, some lenders will require that you use your GST refund to repay part of the loan.â
Again, just provide us with the sale and purchase agreement and your financing arrangement. Weâll enter it into Xero and make sure the full purchase price is picked up in your next GST return.â
Are my loan repayments a business expense?
They arenât. The payments are going towards reducing your loan balance. However, we can claim the interest on the loan for business purposes. We make this adjustment when we prepare your financial statements.â
What happens when I sell a business vehicle?
- If youâve claimed GST on the purchase price, you need to declare it on the sale price
- If the sale is to yourself or a related party, youâll need to know its market value (youâre not allowed to sell it to yourself for $1)
- Tax must be paid on any profit from the sale
- Your asset needs to be removed from the fixed asset register. But itâs best you leave that to us
- If the proceeds from the money donât go through your Xero bank account, you just need to provide us with the sale price and weâll take it from there
Is it smarter to borrow to purchase a vehicle, or lease instead?
It depends. â
If you borrow:
- The vehicle belongs to you or the company, assuming you meet the loan conditions
- GST can be claimed on the full purchase price
- Itâs an asset, and we will depreciate it as an expense over a number of years
- The loan repayments are not deductible, but the interest portion is
When leasing a vehicle:
- In nearly all cases, the vehicle doesnât belong to you or the company
- Â Itâs not a business asset, so we canât depreciate it
- You can claim GST on each payment
- The lease payments are fully tax deductible
Hereâs when we often get the follow-up question: âWhat is my best option for tax purposes?ââ
Thatâs one we canât answer. Itâs more of a business decision and it depends on your cash flow, available finance and personal preferences.â
Who are Beany?
Weâre an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant would. â
We have a dedicated team of remote accountants to take care of your business no matter where you are, so you can focus on growing your business. We take out the âfluffâ, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today. Â â
Got any questions about Beany?
Chat to one of our friendly problem solvers today to get clarity.
Kim Jenkins
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