Expenses Deduction – Motor Vehicle Expenses
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Business owners are often involved in tax and expenses deduction issues relating to the use of vehicles in their business. In particular, what expenses are tax deductible and what expenses are not tax deductible. There are different tax treatments for this issue, but first, it is important to identify the entity of the business. If the vehicle is in the name of the company, the expenses incurred (insurance, depreciation, fuel, Rego, etc.) are basically 100% tax deductible, but the FBT (Fringe Benefit Tax) needs to be considered. This article will not go into more detail on the FBT, so please feel free to contact us if you have any questions about it.
Then if the car is operated under a sole trader or partnership entity, we need to consider the following issues when dealing with tax. If the vehicle is provided for employees, all expenses incurred are tax deductible (taking FBT into account) and if the vehicle is provided for the use of the owner, there are often cases where the vehicle is used for both private and business purposes. The expenses of the business part of the vehicle are tax deductible. This is where we need to use a logbook to calculate the business use portion of the expenses.
Basically, if we do not have a complete record of logbook, we can simply claim up to 25% of all vehicle expenses. If we need a more specific percentage of business use portion, we need to use the logbook to keep a records of vehicle usage. There are two ways to calculate the business use portion of a vehicle through the logbook: the kilometre rates method and the actual cost method.
Kilometre rates method
Around May each year the IRD publishes the kilometre range for the previous financial year. The range rate for the fiscal year 2021-2022 is shown in the chart below. The Tier 1 rate is applicable to kilometres within 14,000km. If the annual mileage exceeds 14,000km, the Tier 2 rate will be applied to the excess mileage.
Vehicle type | Tier 1 rate per km | Tier 2 rate per km |
Petrol or diesel | 83 cents | 31 cents |
Petrol hybrid | 83 cents | 18 cents |
Electric | 83 cents | 10 cents |
The advantage of the kilometre rate is that there is no need to keep all relevant invoices, but the expenses does not include the GST and the Logbook requires a detailed record of every use of the car. It is suitable for specific business travel situations, such as the use of a vehicle in the management of a rental property.
Actual costs method
If we use the actual cost method, the actual usage of the car has to record for 90 consecutive days in Logbook (if the car is used for business purposes only, then Logbook is not required), record the number of kilometres consumed by the car for each business use, and finally the total mileage for 90 days is calculated. The percentage is the proportion of this car used in the business in this consecutive 90 days. All vehicle related costs can be deducted from the business based on this percentage.
The advantage of the actual cost method is that the GST is included in the cost and Logbook only needs to record the percentage calculated after three months (if the percentage of vehicle use in the business does not vary by more than 30%) and use for three years, after three years it needs to be re-recorded for three months. However, it is necessary to keep all types of relevant invoices for seven years. This is suitable for businesses where there is a large mix of public and private use of vehicles during the year.
One thing to note about the above two methods is that the journey from your business to your home will be treated as private use of the vehicle. If you work from home, then the journey from home office to work is considered as business use.