Business

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.

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