GAL 
   
 

Motor Vehicles - Business Portion only is Deductible

 
Grange Associates Ltd - 11 February 2012

This taxation treatment applies to motor vehicles which are “business assets” and owned or leased by:

  • Self employed
  • Partners
  • Non working shareholders of Look Through Companies (LTC)

A tax deduction is available for only the business portion of expenditure, including depreciation. Likewise, an input claim for Goods and Service Tax (GST) is allowable on the business portion. So for this category it is a question of business use, which excludes private use.

Some business motor vehicles that are owned or leased by the self employed, partners and LTC’s are not available nor used for any private purposes. Such vehicles are not included in this category and can be claimed 100 percent for GST and income tax purposes; assuming of course that they are truly not available nor used for any private purposes.

Business and private uses

What is business use?

For a motor vehicle and for a taxpayer, it means travel undertaken by the vehicle wholly in deriving the taxpayer’s income.

What is private use?

For a motor vehicle it is:

  • The use of the vehicle for the non business travel between home and work; and
  • Any other travel that confers a private benefit

Travel to work and travel on work

The position taken by the Courts and used by Inland Revenue in IS 4448 (October 2004) establishes the difference and this distinction is critically important.

  • Travel to work is private in nature (travel in order to commence work)
  • Travel on work is business travel

Travel on work between two locations (of the same business), neither of which is taxpayer’s home, is relatively easy to classify as business use. The taxpayer is engaged in deriving income, travels to another location to derive income, and therefore the travel is incurred in deriving income. However, please note that travel between distinct businesses is likely to be seen as private.

Travel to and from home

Travel between the taxpayer’s home and a workplace is more difficult. It is not sufficient in itself that work is performed at home to categorize such travel as business related.

If the taxpayer performs work at home as a matter of personal circumstances or preferences, the travel from home to work will remain private. Inland Revenue maintain that to be business travel, the need for work to be performed partly at home, and therefore the need for the travel, must arise from the nature of the work.

Travel originating from home will be considered to be travel on work (i.e. business travel) where:

  • A motor vehicle is essential to transport goods or equipment necessary for the performance of work at the home or elsewhere. For example a professional musician who practices at home, then carts his instruments, amplifiers etc to a venue to perform

  • Where the taxpayer carries on an “itinerant occupation” (that is, the taxpayer does not work from a fixed work place and the home is the taxpayer’s base of operations). For example an electrician who works from home, who is required to travel out to various different customers’ sites each day

  • Where a taxpayer is required to be accessible at home for work duties and is required to undertake travel in response to emergency calls. For example, a doctor who is contacted due to an emergency leaves home to attend an emergency. However, IS 4448 considerably limits this principle by requiring the performance of duties to commence before leaving home. It would not be sufficient to just take the call at home, but giving specific instruction on patient care before travelling could get that travel over the line
     
  • Where the travel is “on work” between two work places, one of which is also the taxpayer’s home. For example, a taxpayer who performs a part of his business in the home, out of necessity and not choice, then travels to his “workplace” to continue performing the same income earning activity

While the above principles appear reasonable, IS 4448 goes on to consider situations where a taxpayer travels from home to a place of work (workplace A) en route to another place of work (workplace B).

In this situation Inland Revenue’s position is that where the initial journey to workplace A is private and incidental, the full journey from home to workplace B is deemed to be private travel. Accordingly, pausing to clear the post box would not alter a journey from home to work from being entirely private, and nor would stopping at the workshop to pick up tools on the way to a customer’s premises. However, stopping at the workshop to carry out a repair and then travelling on to the same customer’s premises, after say 2 hours, would change the nature of the second leg of that journey from being private to business. The same applies at the end of the day, but in reverse.

Taking the motor vehicle home for security reasons

Taking a motor vehicle home at the end of the day for security reasons does not in itself, in Inland Revenue’s view, make that journey work related. However, the security of a motor vehicle has been cited as a reason that the home was regarded to be a work place, albeit not a deciding factor.

Incidental private travel while travelling on work

While travelling on work a taxpayer may sometimes take a small detour for a private purpose. For example, while travelling from workplace A to workplace B, a 20km journey, the taxpayer deviates from the direct route (2km) to drop off a family photograph to be framed. Just as incidental business detours do not affect private travel (as in the case of stopping at the post box on the way to work), a private deviation does not affect the nature of business travel.

Determining the business usage portion

Where a motor vehicle is used by a taxpayer for both business and private purposes, there must be an apportionment of the vehicle’s expenditure between those two uses. Taxpayers essentially have the choice of two options for calculating the business use. Although there is also an apportionment method based on mileage rates, this does not strictly apply to so called “business assets” and is considered under the reimbursement category.

Actual records

This method requires a perpetual logbook (actual record), showing the vehicle’s odometer reading at commencement of the business journey, the business distance travelled and the reason for that business journey. This record then determines the “business percentage” during the relevant period.

Logbook

A logbook can be kept during a test period of at least 90 consecutive days which represents, or is likely to represent, the average business proportion of the distance travelled by that motor vehicle. The information that must be maintained in the logbook includes:

  • Start and end dates of the logbook test period

  • Vehicle’s odometer reading at start and end of the logbook test period

  • The date of each business journey

  • The reason for each business journey

  • The distance of each business journey

  • Any other detail that Inland Revenue may require

The use of a logbook triggers the beginning of a logbook term which is a period of up to three years during which the proportion established by the logbook can be applied.

The logbook term starts the day after the end of the previous logbook term, or at the time a new business vehicle is purchased or leased, unless the vehicle is a replacement of an existing vehicle, and the business use of the new vehicle is consistent with that of the old vehicle.

The logbook term will end on the day the vehicle is disposed of (if not replaced), three years after the beginning of the logbook term, a day from which Inland Revenue deems the logbook inadequate, or when specified by the taxpayer.

The logbook term also ends where the actual business use for any month is 20 percent less than that established by the logbook and the logbook is no longer representative of the average business use of the motor vehicle. In this situation the logbook term will end on the last day of that month and a new logbook would need to be established.

Where Inland Revenue considers that the logbook is inadequate, or fails to represent the actual business usage, the taxpayer can be directed to keep a new logbook and the old logbook can be ignored. The business percentage determined by a new logbook can also be applied to the past period.

The taxpayer also needs to maintain a record of the motor vehicle’s annual odometer readings so the total distance travelled annually can be determined.

Where there are no actual records or the period in question is not within the logbook term, the taxpayer is limited to a lesser of the actual business usage of the vehicle or 25 percent of the total use of the vehicle. To be allowed a 25 percent business usage, the taxpayer will need to satisfy Inland Revenue that the actual business usage is at least that. This could be difficult without some records and should not be automatically relied upon.

Apportionment of Expenditure

The income tax deduction for motor vehicle expenditure is calculated based on the formula:

Allowable Deduction = Expenditure x business percentage

The business percentage is based on either actual records or a logbook.

The expenditure is the actual amounts incurred by the business in relation to that motor vehicle and includes items such as fuel, registration, warrant of fitness, insurance, interest, tyres, road user charges, repairs and maintenance. Where the business is GST registered the actual expenditure is net of GST. It also includes a depreciation allowance.

Depreciation

The standard depreciation calculation is based on the formula:

Depreciation = Rate x value x months/12

The deduction allowed where there is private use is:

Allowable Deduction = Standard depreciation x business percentage

Upon disposal of the motor vehicle the resulting gain and loss also needs to be apportioned.

Goods and Service Tax (GST)

Running costs

Motor vehicle running costs (e.g. fuel, registration, warrant of fitness, insurance, tyres, road user charges, repairs and maintenance) can be claimed to the extent to which they are used for, or are available for use in, making taxable supplies. In other words, the business percentage, as determined by either actual records or logbook, of the expenditure can be claimed as a GST input by the business. For example, a $100 petrol purchase for a motor vehicle with a 60 percent business usage results in a $7.82 GST claim ($100 x 3/23 x 60% = $7.82).

Purchase price

Motor vehicles used for business and private purposes are mixed-use assets in terms of GST (applicable for assets purchased after 1 April 2011).

As with running costs GST can only be claimed on the motor vehicle’s purchase price to the extent to which it will be used for, or will be available for use in, making taxable supplies. Therefore, it is necessary to for the registered person to estimate at the time of acquisition how they intend to use the vehicle. This estimate must be fair and reasonable. Little guidance is provided by Inland Revenue as to what is fair and reasonable beyond referring to past logbooks, so it is important to document the basis of any estimate.

The GST claim on a motor vehicle is:

= GST included in purchase price x intended business percentage

By way of example, a $46,000 motor vehicle replacing a vehicle which had an established 59 percent business use gives an initial GST claim of $3,540 ($46,000 x 3/23 x 59% = $3,540).

Future adjustments are required if when comparing the actual business usage to the intended business use, there is more than a 10% or $1,000 difference. These calculations are to be performed at the taxpayer’s balance dates (i.e. 31 March) and the number to be undertaken depends on the value of the asset.

 Value of motor vehicle (excluding GST) Number of adjustments 
 $5,000 or less  No adjustments required
 $5,001 to $10,000  2 adjustments
 $10,001 to $500,000  5 adjustments

A final adjustment is always required when a motor vehicle costing more than $5,000 (excluding GST) is sold or treated as being disposed of.

Further, wherever a motor vehicle which has been subject to a GST input claim, whether partial or full and irrespective of whether a final adjustment is made, GST will need to be accounted for upon its disposal. The amount of GST payable upon disposal will depend on the vehicle’s business percentage.

Treatment of the private portion

The non business portion of the running costs (inclusive of GST) is debited (charged) to the taxpayer in the business’s accounts.

Similarly, the non business portion of the motor vehicle’s depreciation, based on the non business portion of the purchase price (including GST), is also debited to the taxpayer in the business’s accounts. Any subsequent adjustment to the GST on the vehicle’s cost will also result in a charge or credit to the taxpayer’s current account, as will the vehicle’s disposal.

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All information is correct at the date of article publication. Please note we provide the information as a service only. Accordingly, the contents are not intended as a substitute for specific professional advice and should not be relied upon for that purpose.   


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