Changes have been made to some of the ways that motor vehicle operating costs can be claimed for business purposes, effective for the year ended 31 March 2018, but practically coming into effect for the 2019 tax year.
The three methods to claim deductions for running a vehicle are;
1. The business (other than a sole trader) owning the vehicle and paying fringe benefits tax (FBT)
2. The business claiming a rate per kilometre used for business purposes.
3. The business claiming the actual running costs of the vehicle based on actual expenditure and its percentage used in business
For method 1, if your business owns a vehicle and provides it to an employee or shareholder/employee including for private use, there are no changes and fringe benefits tax requirements remain as before.
For methods 2 and 3 however if you only claim the business running costs or reimburse an employee or shareholder/employee for their costs the changes outlined here will affect you.
The changes that come into effect include;
Reimbursement for distance travelled
- The removal of the 5,000 kilometre limit for claiming mileage at 73 cents per km.
- The replacement of that method with a two tier claiming method.
- In tier one, the rate per km is 76 cents per km. This claim rate is limited to applying to the first 14,000 km travelled in the vehicle per year, regardless of what percent of that distance is for business. (For instance if your business usage percentage is 50%, you can only apply the 76 cents rate to 7,000 km.)
- In tier two, after 14,000 km, there are three rates in place depending on the vehicle type:
- Petrol or diesel 26 cents per Km (for business)
- Petrol Hybrid 18 cents per Km (for business)
- Electric 9 cents per Km (for business)
Reimbursement for running costs incurred
Determining the business portion of running the vehicle remains, with the use of a logbook to determine the business percentage using a three month sample applies. This business portion determined can be applied to either the distance travelled method or the running costs reimbursement method. If no logbook is used, the 25% default rate applies, as long as it is justifiable.
No claim for depreciation applies to both methods.
Another important distinction is that the method chosen needs to be applied when the vehicle is acquired or first used in business and must remain in effect until that vehicle is disposed. The method chosen can vary from business vehicle to vehicle.
These methods can be used by a close company instead of having to pay fringe benefits tax, if providing a motor vehicle is the only fringe benefit item provided.
The selection of method is applied in the tax return filed when the vehicle is engaged, though there is no formal declaration. The expense included in taxable income dictates the method. For vehicles owned at 1 April 2017, the choice will need to be elected in the 2018 income tax return.
If an employee is reimbursed using either of these methods, the reimbursement is tax exempt to the employee
As the most tax effective method will vary from vehicle to vehicle and there may be other questions about accounting for costs of operating a motor vehicle in business we encourage you to contact us to ensure your choice is the best option for you.