What work-related car expenses can you claim?

One of the most confusing tax issues for small business owners is claiming work-related car expenses. We’ve spoken to two expert accountants to help navigate you through it.

Every week, without fail, there’s one question chartered accountant Stuart Ruddell receives from small business owners: ‘how do I claim work-related car expenses properly?’

“New Zealand tax law isn’t always clear and there can be multiple ways or approaches to deductions – the most discussed one being motor vehicles,” explains Ruddell, Director at JBM & Associates Limited.

Now, if you only use your vehicle for business purposes, then you can claim the full running costs as a business expense.

But if you use your vehicle for both business and personal reasons, then you’ll need to keep a logbook so that you can accurately calculate and justify to Inland Revenue (IRD) the work-related percentage.

“The difficulty comes with actually keeping a logbook,” acknowledges chartered accountant Butch Mawdsley, Director at REB Group.

“It’s quite difficult for business owners to actually undertake that exercise as it’s time consuming.”

The good news, however, says Mawdsley, is that you only need to keep a logbook for 90 days – and that will last for three years, providing the proportion of your vehicle’s business use doesn’t change by more than 20%.

Once your logbook (here’s an IRD template) is sorted, there are two different methods that sole traders or partnership businesses can choose to calculate expense deductions: the ‘Actual Costs’ method and the ‘Kilometre Rate’ method (both discussed below).

If you own and run a small company with shareholder-employees, more complicated rules and decisions regarding fringe benefit tax (FBT) may apply and professional tax advice should be sought.

Without further ado, let’s start by getting your logbook in order.

How to keep a vehicle logbook

Keeping a logbook is not fun, Ruddell says, but just remember, you’ll likely only need to do it once every three years.

“I initially hated it but soon found it interesting to understand how far I travel as a mobile accountant – plus it also saved me thousands of dollars in tax,” he says.

The IRD says your logbook should record:

  • The start date and the vehicle’s odometer reading on that day.
  • The date, distance and reason for each business journey.
  • The end date of the 90-day period, and the vehicle’s odometer reading on that day and any other important notes.

Once done, calculate the total distance travelled. Next, work out the kilometres that were driven for business. Finally, calculate the proportion/percentage driven for business compared to the total distance travelled.

It might be 40% business, 60% personal. Or even 80% business, 20% personal – it will depend on your circumstances.

After that’s sorted your next step is to choose a method.

METHOD ONE: The Actual Costs method

As the name suggests, this method requires you to keep track of the actual costs of running your vehicle.

That means keeping accurate records of all your vehicle-related expenses over the year, including petrol, oil, a warrant of fitness, repairs and maintenance (including tyres), insurance, registration, tolls and parking.

You can then also claim GST on the purchase price of the vehicle in relation to the business use.

You have two options to calculate the work-related portion under this method:

Option 1: By using a logbook – as explained above.

Option 2: By claiming up to 25% of all vehicle expenses. However, keep in mind you could still be asked by the IRD to justify the percentage claimed.

Then, simply apply the following calculation: Actual Costs x Work-related portion (Option 1 or Option 2) = Claimable Cost.

METHOD TWO: The Kilometre Rate method

Below are the rates per kilometre applied for the 2018/2019 income year (the IRD will publish the 2019/20 kilometre rates after the tax year ends, usually by May).

  • Petrol or Diesel: Tier One rate 79 cents and Tier Two rate 30 cents.
  • Petrol Hybrid: Tier One rate 79 cents and Tier Two rate 19 cents.
  • Electric: Tier One rate 79 cents and Tier Two rate 9 cents.

The Tier One rate is to provide for a combination of your vehicle’s fixed and running costs, and can be used for the first 14,000 kilometres travelled by the vehicle in a financial year (including for both business and personal purposes).

The Tier Two rate is to provide for running costs only. Use the Tier two rate for the business portion of any travel over 14,000 kilometres in a year.

It’s worth noting that when using this method you do not need to consider GST and that kilometre rates include depreciation, so make sure you don’t claim a separate depreciation deduction for the vehicle.

Calculation example: Let’s say your diesel vehicle travelled a total of 30,000km (both personal and business) over a financial year, and that your 90-day logbook showed a split of 60% work and 40% personal. You’d therefore calculate the following:

Tier one: 14,000km x 79 cents = $11,060
60% (work proportion) of $11,060 = $6,636

Tier two: 16,000km x 30 cents = $4,800
60% (work proportion) of $4,800 = $2,880

Total deduction amount = $6,636 (Tier One) + $2,880 (Tier Two) = $9,516.

Final tips on claiming car expenses

What method you decide to use will depend on your business’s circumstances.

While the Kilometre Rate method might seem like the more straightforward option as you don’t need to keep as many receipts, Ruddell says the Actual Cost method can better represent a vehicle’s depreciation – especially if you haven’t racked up many kilometres that year.

“Often the big expense not factored into the Kilometre Method is depreciation, which can be between 20% to 30% of the vehicle purchase price over the first year,” Ruddell says.

And if you haven’t kept an accurate logbook, but you’ve got a work diary that’s recorded accurate details of business meetings outside of your workplace, Mawdsley says that will suffice.

“You can put the address details of those business meetings into a spreadsheet and work out the distances using Google Maps. So essentially you can use a diary to keep a log of your business travel,” he says.

“Don’t try and push the envelope. Stick to realistic travel distances and don’t be greedy for a few dollars.

“Stay within the realms of the law and claim legitimate amounts.”

Need a little help upgrading your work vehicle? Talk to a Prospa small business lending specialist about how a small business loan might get your motor running.

The information in this post is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information as at the date of publication, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information for any reason, including due to the passage of time, or any loss or damage suffered by any person directly or indirectly through relying on this information.

Business tax deductions you might not know about

There are few among us who don’t enjoy seeking out every possible legal tax claim. Two expert tax accountants share their insights into commonly overlooked small business tax deductions.

Claim your home office space

Roger Shackelford, Tax Partner with Baker Tilly Staples Rodway, based in Wellington, says there are the obvious tax deductions, like advertising and bank charges, but people often forget that, if they work from home, they may be able to claim a portion of their mortgage interest, rates and insurance.

Georgie Webber, a Chartered Accountant with Peat Johnson Murray in Auckland, agrees. To work out how much of your home office space you may be able to claim for, Webber says it’s important to establish how many square metres your home covers, and what percentage of the space constitutes your workspace.

“You may also be able to claim part of your utilities bills using this method,” she says. “And if you’re a tradie, and you use your garage to store tools and equipment you could claim that too.”

Deducting entertainment expenses

Meetings (including dinners outside of work hours) at which the main topic of conversation is business, may also be partially deductible, along with thank you gifts that you send to a client, Shackelford says. But it is worth checking with your tax advisor when in doubt on these sorts of expenses.

Subscriptions and memberships

Shackelford adds that expenses like subscriptions and memberships may also be business tax deductions. “For example, if you’re a member of the local golf club and you take your clients out with you every now and again, a proportion of the golf membership could be a legitimate business tax deduction,” he says.

Motor vehicle expenses

“In New Zealand, you can claim motor vehicle expenses if you’re using a motor vehicle for business. You need to complete a log book with the kilometres driven and the reason for the trip so you can claim the mileage. A bit more record keeping could give you additional tax deductions,” Shackelford says.

Depreciation of assets

“Some small businesses miss out on the depreciation expense if they don’t account for their asset purchases, like computers,” Webber says. “In New Zealand, it’s a 50% depreciation rate.”

Networking events

“Lots of people go to networking groups and if there was a cost, like food or wine purchases, a percentage of that could be deductible,” Webber says.

Keep records

“People who are GST-registered might be more likely to have an accountant,” says Webber. “But when they’re not registered and doing it all themselves, some expense claims might fall through the cracks, mainly because they’re not filing returns and claiming more regularly.”

She adds, “Another thing to watch out for is if you have, say, three bank accounts and a credit card you might miss a few deductions because you’re paying for stuff all over the show. It makes it a bit harder to collate your information.”

If any of these deductions sound like they might apply to your small business, speak to your tax advisor for personalised advice on what your business might be eligible to claim.

The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.

Bookkeeper vs accountant: What’s the best choice for your small business?

If you’re looking to enlist a professional to help your small business sort out its financials for the first time, then congratulations, you’ve likely done more than a few things right to get this far.

But how do you determine what level of financial assistance your small business truly needs? Should you turn to a bookkeeper, an accountant or both?

Well, before making a decision on the bookkeeper v accountant debate, the first step is to understand the differences between the two roles and how each professional can assist your small business.

“A lot of people tend to think that bookkeeping and accounting are one and the same,” says Samantha Priday, Director of bookkeeping service Solving Accounts Matters, “and although we tend to work towards some of the same goals, our daily tasks can be very different.”

What does a bookkeeper do?

Bookkeeping is the process of recording a business’s daily transactions in a consistent way, explains Priday.

That can include completing payroll, recording financial transactions, producing invoices, maintaining and balancing subsidiaries, general ledgers and historical accounts, as well as posting debits and credits.

“A bookkeeper can play an essential role in the upkeep of a business to make sure everything is being run smoothly, bills are getting paid on time, staff are being paid correctly and IRD filings are completed in a timely manner,” Priday says.

She says one situation where a business owner may opt for a bookkeeper over an accountant is when they’re just starting out – the bookkeeper can help if the business owner has limited business finance knowledge or is too busy growing the business.

“A bookkeeper can help them keep records of their daily transactions in order to stay compliant, and then at the end of the financial year they may assign an accountant to help with tax filings,” Priday says.

Cost: Many bookkeepers will offer monthly retainer packages between five hours (about $250) and 40 hours (about $1500­-$2000). Generally, the more hours you require, the lower their hourly rate.

What does an accountant do?

An accountant takes more of a strategic approach to your business, explains Chris Mercer, Managing Director at MBP Advisors + Accountants, which also runs a bookkeeping service.

“We review, either on a bi-monthly or quarterly basis, everything that’s done by our clients’ bookkeepers. And we use that data to have strategic conversations with businesses about the trajectory of their cash flow or the way they’ve worked towards their business goals for the year,” he says.

“We also use that reliable data at the end of the year to produce official financial statements and tax returns.”

Mercer adds that accountants are generally going to be more highly trained in the area of tax compliance.

“That said, a bookkeeper also has to have a high degree of working knowledge in tax because they’re going to be doing the coding and classifying of transactions that will have an impact on GST and income tax,” he says.

Priday says small businesses generally consider enlisting the services of an accountant when they start employing more staff members, or need specialised reporting and analysis completed.

“An accountant can be very helpful when a business owner is looking to upgrade or improve how their business runs,” she says.

“The accountant will supply meaningful, relevant, reliable and accurate financial information that will allow the users of that information to make informed judgements and decisions.”

Cost: Accounting firms may charge a fixed monthly fee for their accounting services, generally ranging from $100 to $400 per month, or a casual rate between $100 and $300 per hour.

Best of both worlds

As you’ve probably worked out, the two roles complement one another and it’s not uncommon for many small businesses to employ the services of both.

“A good bookkeeper will attach evidence to transactions, which most small business owners don’t do, so if the accountant has ever got any queries, the information is all there,” Mercer says.

Mercer recommends checking that the bookkeeper is a member of The Institute of Certified NZ Bookkeepers (ICNZB). You can also search for a bookkeeper near you on that site.

To find an accountant near you visit The Accountants and Tax Agents Institute of New Zealand (ATAINZ) or the New Zealand Chartered Accountants (NZ CA).

The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information as at the date of publication, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information for any reason, including due to the passage of time, or any loss or damage suffered by any person directly or indirectly through relying on this information.

Infographic: 2019-20 end of financial year dates you need to know

For something that happens every year, the end of financial year (EOFY) period has a rare power to catch small business owners by surprise.

But getting ahead of the key tax year dates that NZ small business owners need to know will do more than just reduce your stress – it can potentially save you money as well.

2019-20 tax year dates you need to know

NZ’s financial year period

In New Zealand, the financial year, or tax year, is from 1 April to 31 March.

“The majority of businesses have this and it is known as the ‘standard’,” explains Geoffrey Hughes, Director at Hughes Judd Accounting.

“You can apply to change from the usual financial year to a ‘non-standard’, which will be considered on a merit basis. For example, many farming and agricultural businesses have different tax dates due to the seasonal nature of their business.”

Too many businesses leave it too late

Hughes says his business is often approached by new clients who are being followed up by Inland Revenue (IRD).

“The consequences, apart from IRD financial penalties, is possible loss of extended filing times going forward and an unexpected tax bill,” he says.

Stuart Ruddell, Director at JBM & Associates Limited, says the number one reason new clients approach his business is that they’ve left EOFY tax obligations too late.

The financial penalties of ignoring tax obligations

Inland Revenue currently charges $50 or $250 anytime you file a tax return late, depending on your circumstances, says Ruddell.

“On top of that, if you’re late filing the return you will be late for payment,” he explains.

“This then adds on Use of Money Interest of 8.35% (per annum), but you also get late payment penalties, which could be 5% (per annum) of the due amount during the first month and then 1% (per annum) of the tax due every month thereafter.”

Meanwhile, Hughes says, if you’re going to be late you should contact IRD prior to your tax deadline.

Of course, it’s better to be on time than it is to ask for forgiveness for being late, so make sure you mark the above key EOFY tax year dates in your calendar.

If you need some extra funds to grow your business in the new financial year or to get on top of your tax payments, talk to Prospa about how we could help meet your business finance needs. 

The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.