GAL 
   
 

Motor Vehicles - Reimbursement of Business Use of Personal Motor Vehicles

 
Grange Associates Ltd - 11 February 2012 (updated 12 September 2012, 4 September 2013)

This taxation treatment applies to the business use of personal motor vehicles by:

  • Self employed

  • Partners

  • LTC working shareholders

  • LTC non working shareholders

  • Company shareholder employees

  • Trustees

  • All employees

Common to all of the above is that a vehicle outside the assets of a business is used wholly in deriving the income of that business. The provider of the personal motor vehicle incurs costs in relation to that business use, which the business then reimburses them for.

The person providing the motor vehicle does not directly claim an income tax deduction for the cost of providing the vehicle. If they were making a claim then in all instances, except for case of employees, the vehicle would be a business asset and included under the “business portion only is deductible” category. Employees are specifically prohibited from claiming an income tax deduction for costs they incur in connection with their employment.

In the above circumstances, for income tax purposes, the reimbursement is not assessable to the person providing the vehicle and is deductible for the business.

If more than the business use related costs are reimbursed, the excess is assessable to the recipient for income tax purposes. The business is still able to take a full deduction. To ensure the reimbursement is on excessive the actual business use must be determined.

What is business use?

Generally, for a motor vehicle and for a taxpayer, it means travel undertaken by the vehicle wholly in deriving the taxpayer’s income. Assuming the taxpayer is an employee, the taxpayer’s income is their salary or wages.

Travel on work between two locations (of the same business), neither of which is the 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 between home and work - travel to work and travel on work

Normally the travel between home and work is private travel and not business use. However, there can be exceptions.

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 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.

Determining the reimbursement

Reimbursements can be made on an actual basis, or based on a reasonable estimate (including mileage rates), although no GST claim is allowable on estimated costs.

Actual Records

This option requires that detailed records be kept by the employee of all vehicle costs and business use of the vehicle. A perpetual logbook should be maintained, detailing business running, total annual running and costs.

Reimbursements can include both fixed costs such as registration, insurance and depreciation as well as running costs such as fuel, oil and repairs.

Reasonable Estimate – Logbook

As with vehicles which are owned by the business, a logbook can be kept for a test period of at least 90 consecutive days to determine a reasonable estimate of business use for reimbursement. The test period should represent the average business proportion of the distance travelled by that 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.

IRD Mileage Rates

The IRD introduced vehicle reimbursement rates for employer reimbursement of employees in 1995. The current IRD mileage rate for the 2013 income year remains unchanged from 2012 at 77c per kilometre.

For self-employed people, there is a limit of 5,000 business kilometres per year. If a self-employed person was likely to travel more than 5,000 kilometres on business, then either the actual method or a reasonable estimate calculated via logbook would be more appropriate than using mileage rates.

Other Mileage Rates

Inland Revenue also accepts the use of motor vehicle running cost estimates from reputable sources, specifically New Zealand AA’s published mileage rates, to calculate reimbursements to employees. These rates are higher than the IRD mileage rates for vehicles in excess of 2,000cc.

Selecting a Method

In most cases, using actual costs will give the highest level of reimbursement to the employee, and therefore the highest tax deduction for the company. The downside to this is the extra time involved in ongoing record keeping.

Example

A shareholder employee is reimbursed by his company for the use of his personal motor vehicle, which is also used on business. He records all travel in a logbook and keeps a record of all vehicle expenses on an ongoing basis. His business travel for the year is 7,500km, which works out to be 60% of his total travel for the year of 12,500km.

The car is a 2.5 litre Mazda 3 which cost $42,000, which has been financed, with interest costs of $6,300 in the first year.

Depreciation is 30% diminishing value per annum.

The total costs for the year were:

Petrol     5,200
Registration       400
Insurance       500
Repairs       600
Depreciation   12,600
Interest     6,300
Total

 $25,600

From this we can work out the running costs per kilometre for the vehicle as follows:

$25,600/12,500km = $2.05

The vehicle travelled 7,500km on business, so the shareholder employee is entitled to a tax free reimbursement of 7,500 x $2.05 = $15,375.

As actual costs were recorded and reimbursed, the company is also entitled to make a GST claim on the costs reimbursed which included GST. In this case, all expenses excluding depreciation and interest attract GST, giving us a total of $6,700 GST inclusive expenses.

So, $6,700 x 60% business use x 3/23 = $524.35 GST claim for the company.

Total claim for company:

GST $524.35 GST

Tax deduction $15,375 - $524.35 = $14,850.65

Alternatively, if the company chose to use mileage rates for reimbursement, we would have the following result:

IRD Rates: 7,500km x 0.77 = $5,775 reimbursement and no GST claim can be made.

AA Rates: 7,500 x 0.788 = $5,910 reimbursement and no GST claim can be made.

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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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