Here’s 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.
When you’re a client of ours, you won’t have to worry too much – we make sure you always claim the right amount. But regardless, let’s explore how the system works.
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.
But business purposes doesn’t 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.
When a sole trader or partnership chooses to use a business vehicle privately, too, the costs need to be separated.
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:
- 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 it’s 70% of the time, 70% of a WOF or a service can be claimed as a business expense
Assuming your travel habits don’t change significantly, your logbook can be valid for up to three years.
There’s also some good news about logbooks. While you can still find a template on the IRD’s 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.
If you don’t intend to keep a logbook, you have two more options.
- Claim up to 25% of all vehicle expenses. The IRD may ask you to justify whichever percentage you opt for
- Claim $0.82 per kilometre for up to 3,500km, and then a lower rate for additional kilometres. You’ll still need to track your business travel, but without as much detail as in a logbook
In addition to the methods mentioned above, companies have another option. Here’s how the “Motor Vehicle Reimbursement” (also known as “FBT Reimbursement”) works.
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.
If a shareholder decides to use the vehicle for private use, this benefit they’re receiving must be recorded in the company’s financial statements. We call it a benefit that the shareholder is receiving, because they don’t need to purchase a car, and the company is paying for their vehicle expenses.
The company must be reimbursed for this benefit.
We calculate the reimbursement based on the vehicle’s value when it was brought into the company, and the number of days it’s available for private use. The reimbursement is then recorded as a separate income line in the company’s financial statements (it’s considered income because the company is receiving compensation from the shareholder).
It’s important to understand the concept of availability. Shareholders reimburse the company for any day that the vehicle is available to them – which includes when it sits in their driveways.
Exceptions to this rule are:
- A vehicle serving a specific function, which cannot take passengers
- The vehicle showing prominent branding which can’t 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 doesn’t need to file FBT returns to the IRD
- No cash changes hands. The amount is calculated and then adjusted when it’s time to prepare financial statements
An important note is that FBT Reimbursement doesn’t apply to non-shareholder employees. Their benefit falls under the Fringe Benefits Tax (FBT) regime and is accounted for separately.
Can I claim GST on a personal vehicle that I use for business?
You can, indeed.
- If you’re 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 we’ll 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.
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.
Again, just provide us with the sale and purchase agreement and your financing arrangement. We’ll enter it into Xero and make sure the full purchase price is picked up in your next GST return.
Are my loan repayments a business expense?
They aren’t. 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.
What happens when I sell a business vehicle?
- If you’ve 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, you’ll need to know its market value (you’re 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 it’s best you leave that to us
- If the proceeds from the money don’t go through your Xero bank account, you just need to provide us with the sale price and we’ll take it from there
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
- It’s 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 doesn’t belong to you or the company.
- It’s not a business asset, so we can’t depreciate it.
- You can claim GST on each payment.
- The lease payments are fully tax deductible.
Here’s when we often get the follow-up question: “What is my best option for tax purposes?”
That’s one we can’t answer. It’s more of a business decision and it depends on your cash-flow, available finance and personal preferences.