What tax deductions are available for motor vehicle expenses and depreciation incurred in carrying on a business. The answer to this question depends on the type of entity carrying on the business.
For a company, the costs are generally fully tax deductible. However, Fringe Benefit Tax (FBT) implications must be considered.
It is not the purpose of this article to discuss tax deductions and FBT implications for a company. If you have any questions in this area, please contact your BDO advisor.
We discuss below the tax deductions available for motor vehicle expenses for non-corporate entities such as sole traders and partnerships.
A tax deduction is available for any motor vehicle costs and depreciation to the extent they are incurred in deriving taxable income.
If the vehicle is provided to an employee a full deduction is generally available but FBT implications will need to be considered.
If the vehicle is used by an owner/operator and is used for both business and private purposes an apportionment will need to be made to exclude the costs and depreciation relating to private use.
It is important to remember that travel from your home to work is considered a personal trip. If your home and place of work are the same (e.g. If you operate your business from home), then travel from your home to other places of work (e.g. From the office to the job site) will be deductible. There are cases on the margin in terms of whether home is a base of work – please contact us if you wish to discuss this further.
There are two ways for a business to calculate their vehicle expenses – noting that the same method must be used for as long as the business owns the vehicle.
- Kilometre rate: You will need to keep a logbook to record how many kilometres are travelled each year on business. You will also need to be able to show when the vehicle travels a total of more than 14,000 kilometres in the year to know what tier kilometre rate to use. The business will then use the logbook kilometres and multiply this by IRD’s published kilometre rate to calculate the total expenses the business can claim. The kilometre rates for 2017 through to 2020 can be found at the bottom of the following link. Also note that a logbook may be kept for a 90-day test period to determine the average business portion of travel.
- Actual costs: You will need to keep track of the actual costs to run the vehicle and may claim these in proportion to the amount the vehicle is used for business. This proportion of business use will be determined by a 90-day logbook (unless the vehicle is used solely for business, in which case a logbook would not be required). Businesses will need to keep accurate records of any expenses they are claiming. The logbook results (proportion of business use) can be used for no more than 3 years, and the business use of the vehicle cannot have changed by more than 30% during the period it is being used.
Case Study - Peter's Pools Partnership (PPP)
Peter’s Pools Partnership (PPP) is a partnership specialising in pool installation and maintenance. Peter started the partnership with his brother Thomas 3 years ago from their home in Rolleston. They still operate from their home in Rolleston, which includes a large home office and a storage shed out the back.
Peter has read the home office article by BDO and realised there were some expenses he had not been claiming in the past. Peter got in touch with his local advisor for assistance and will now be maximising his claim for the next financial year.
PPP has recently purchased a new van for their business. Peter is wanting to calculate the vehicle expenses that the partnership will be able to claim and reached out to his BDO advisor again for assistance.
It is important to note that Sole Traders and Partnerships are not liable for FBT on business vehicles (unless they are provided to employees) but are required to make income tax and GST adjustments for any private use.
PPP will use a logbook to calculate the proportion of business use as follows:
- PPP keeps a logbook for 90-days and takes the odometer reading at day 1 and 90.
- PPP records the dates, distances, and reason for each business journey.
- PPP adds up the distance travelled for business and compares this to the total distance travelled over the full 90-day period. This will allow PPP to calculate the proportion of business use.
- PPP will apply this proportion to all vehicle related expenditure and can continue to use the proportion result from the logbook for no more than 3 years (provided the business use does not change by more than 30%).
PPP’s 90-day logbook showed that the business use of the vehicle was 30%. For the 2020 financial year, PPP travelled 10,000 kilometres overall. When applying the 30% business use proportion from the logbook, that means PPP will be able to claim the motor vehicle expenses associated with 3,000kms of travel or 30% of the actual costs incurred. The business incurred $20,000 on vehicle related expenses at the end of the year, including items such as petrol, warrant of fitness, registration, insurances, depreciation, and repairs.
As this is a new vehicle, PPP has the choice using the Kilometre Rate or Actual Cost method to calculate their deductible motor vehicle expenditure.
Please note that PPP is not registered for GST, but a sole trader or partnership would need to consider this when recording their motor vehicle expenses.
The business had driven a total of 10,000 kilometres this year with 3,000 of those being for business (30% business use).
3,000km’s x $0.79 per km = $2,370 of deductible motor vehicle expenditure to claim.
If the total travel in the following year is 12,000 kilometres, then the logbook business portion (30%) may be used to determine the business kilometres (30% x 12,000 kms = 3,600 kms)
Note: The kilometre rate used above is the Tier 1 rate for the 2018/2019 year (Tier 1 – First 14,000km travelled by the vehicle during the year, Tier 2 is any kms travelled after that). The 2019/2020 rates were not available at the date of writing this article due to COVID-19. On that basis, we recommend you check the IRD website frequently and update your calculation when the new rates have been published. The IRD allows you to use the 2018/2019 rates in the interim period.
PPP can take the actual amount of business-related expenditure incurred and multiply this by the proportion of business use they have calculated in the logbook.
$20,000 Actual Costs x 30% Business Use = $6,000 of deductible motor vehicle expenditure to claim.
Whilst the Actual Cost method results in a higher claim for PPP - they must also remember that the method they choose must be applied for the entire duration they own the vehicle.
If you are not sure about any of the following items, please get in touch with your local BDO advisor:
- Which method your business should select to calculate its motor vehicle expenses
- Whether your business has exposure to Fringe Benefits Tax
- How to account for the GST on motor vehicle expenses (if your business is GST registered)
- Accounting Treatment/Journals required to reflect the private portion of motor vehicle expenses already claimed
- What motor vehicle expenses your business can claim
- How to prepare a logbook