Claiming deductions for business use of your private motor vehicle

A person has a choice of two methods to claim a deduction for business use of a private motor vehicle. The deduction can be based on the actual costs incurred in business use of the vehicle or an amount calculated using the kilometre rate method. Once a method is chosen, you must continue to use that method for that vehicle, until it is sold or no longer used in your business.

The kilometre rate method replaced the mileage rate for the 2017-18 tax year onwards. Under the kilometre rate method, the deduction for motor vehicle expenses is found by multiplying the IRD’s kilometre rate by the total kilometres travelled in the year by the proportion of business use. The kilometre rate can also be used by close companies, in specific situations, as an alternative to paying Fringe Benefits Tax (FBT) on a motor vehicle and as a basis to reimburse employees for using a personal vehicle while performing employment duties.

Inland Revenue has released a draft operational statement outlining how the Commissioner considers that the kilometre rate method is to be applied. In the draft statement, Inland Revenue signals its intention to release specific two-tier kilometre rates for different types of vehicles and engine sizes. The tier one rate will apply with respect to the first 14,000 km travelled in a year. Once a vehicle has travelled more than 14,000 km in a year, the lower tier two rate must be applied. The two-tier rates will also apply when an employer is using the kilometre rate to reimburse employees.

The two tiers mean that it will be necessary to maintain a logbook or other adequate records to establish not only the business use of a vehicle, but also the total distance the vehicle has travelled in the year. This requirement will also apply to employees being reimbursed for business use of a motor vehicle. In the absence of a logbook or other adequate records, the tier one rate can only be used to reimburse the first 3,500 km of business use. Business use beyond 3,500 km can only be reimbursed at the lower tier two rate.

Speak to your Findex adviser to find out how Inland Revenue’s new policy will affect your deductions for business use of your private vehicle, or reimbursements you pay to employees for using their private vehicle in your business.