Having access to a vehicle is quite a necessity for business these days. If you are in business for yourself your company vehicle is probably also the family car. This gives rise to some interesting tax questions about how much of your ride you can claim as a valid business deduction.
There are a lot of things to consider – more than I can go through in this short article, but here are the three main methods for claiming a vehicle on your tax return.
Under this method you keep a log book and claim up to 70 cents per kilometer traveled for business use. There’s no need to keep receipts of actual expenses but you do need a log book to justify the number of clicks you are claiming. IRD state that for self-employed people or shareholder-employees that once you do over 5,000 kms in a year you must use the Share of Use method. If you claim mileage then you can’t claim any depreciation or direct expenses unless they are specifically business-related (repairs to the vehicle for damage caused while on the job is probably claimable, but a mechanical breakdown is generally considered a cost of ownership and not deductible). Under this method the vehicle is in your personal name and there are no implications when changing vehicles. This is a great option when business use is a lower proportion of total use or where the vehicle has a lower value.
Share of Use
Let’s say that you drive about 25,000 kms each year, and 20,000 of those are business related. That’s 80% of the total use of the vehicle for business. If you can substantiate that number (keeping a log book for three months straight every few years is usually sufficient) then you can claim 80% of your fuel, insurance, repairs and so on. You can even claim the GST on the 80% of expenses as well as 80% of the GST on the purchase price of the vehicle, and even depreciation. Under this method the vehicle is in your personal name, but you may need to pay back depreciation and GST when it is sold. This is a great option for high-value vehicles or where business use is a high proportion of total use.
The third option is to have the vehicle owned by the company (this option does not apply to sole traders or partnerships). Here, the company claims all the expenses as a business deduction. However, you may also be liable for Fringe Benefit Tax if the vehicle is available for private use of any staff or owners. FBT is based on the cost price of the vehicle (and doesn’t matter whether the vehicle is leased or owned outright), so may not be the best option for that new BMW you have your eye on. This option can be very good where the vehicle is of lower value and/or the business use is a lower proportion of the total use.
Here are some of the most common pitfalls people encounter dealing with vehicles and tax:
- A company vehicle may be subject to FBT even if there has been no private use. A signed statement from an employee saying that they won’t use it for personal use isn’t enough. Claiming that you have another private vehicle won’t wash either. It is the availability for private use, not the act of private use, that is being taxed (I know, I’m a party pooper!). You need to go one step further and prove that it is not available and not actually used for business use. For shareholder-employees (and especially when the car is parked outside your bedroom at night) you need a signed agreement that the car will not be used for personal use and a log book to prove that it was not used. Sometimes it’s just easier to pay the tax or use the Share of Use method!
- Parking fines and speeding fines are not deductible (ouch – watch that parking meter), but parking fees are. I got hit with a tow charge from the council once – even though I got there before they towed me. Expensive lesson, and no assistance from the tax man!
- Claiming fuel fill-ups (unless it is a company car) is problematic – mileage is usually the best option here.
- Your driver’s license registration fee is not a valid deduction (sorry).
- Driving to and from work is not deductible unless home is your workplace (which is not difficult for most business owners). But if it’s a company car (and you’re paying the FBT), then there’s no problem.
As with anything there are so many variations, exceptions and additional factors. This information is general advice. You should see a professional before making any decisions (a professional accountant, that is – we’ll discuss whether your professional therapist is a valid deduction another time). We can help you with an assessment of your situation to see which of the various methods would be the best for you. Call Peter on 04-831-1232 for a consultation.