What work-related car expenses can you claim?
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 Stuart, Director at JBM & Associates Limited.
If you only use your vehicle for business purposes, then you can potentially claim for the full running costs as a business expense.
But if you use your vehicle for both business and personal reasons, you can claim only a portion of the total costs, and it’s important to keep a logbook so that you can accurately calculate and justify to Inland Revenue (IRD) the percentage of vehicle use that’s work-related. Not keeping logs may limit what can be claimed.
“The difficulty comes with actually keeping a logbook,” acknowledges chartered accountant Butch Mawdsley, Director at REB Group. “It’s time consuming.”
The good news, however, says Butch, is that most people only need to log vehicle use for 90 consecutive days, and that logbook remains valid for three years, as long as the vehicle’s business use doesn’t change by more than 20% in that time.
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.
Here’s how you could get your logbook in order.
How to keep a vehicle logbook
While keeping a logbook won’t be a career highlight, it can provide useful insights for a small business owner, as well as the tax benefits.
“I initially hated it, but soon found it interesting to understand how far I travel as a mobile accountant,” says Stuart. “Plus it also saved me thousands of dollars in tax.”
Use the IRD template or, if you prefer, find a vehicle logbook or mileage app for your smartphone that provides the functionality you need. Digital records will make your life easier when it comes time to calculate.
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.
- Other information the IRD might need to understand your logbook and claim.
Use the logbook to calculate the total distance your vehicle has travelled and the distance driven for business. Use those numbers to calculate the percentage that was for business.
(Distance travelled for business / Total distance travelled) x 100 = Percentage of vehicle use for business
For example, if you have travelled 500km over the 90 days, and 150km of that was for business, your formula will be:
(150/500) x 100 = 30%
What to do if you don’t have a vehicle logbook
If you haven’t kept an accurate logbook, all is not lost. Butch says a work diary that’s recorded accurate details of business meetings outside of your workplace may suffice – you just have some frustrating calculations to do.
“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,” Butch says.
But he adds a warning: “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.”
Choose a calculation method
There are two methods for calculating your deduction:
- The Actual Costs method
- The Kilometre Rate method
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, Stuart says the Actual Cost method could better represent a vehicle’s depreciation – especially if you haven’t racked up many kilometres in a 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,” Stuart says.
METHOD ONE: The Actual Costs method
This method requires you to keep track of the total costs of running your vehicle – not just the work-related costs – so that you can then claim the work-related percentage of those costs.
That means keeping accurate records and proof of all of your vehicle-related expenses over the year (not just for the 90-day logbook period), including all petrol, oil, a warrant of fitness, repairs and maintenance (including tyres), insurance, registration, tolls and parking.
With the purchase of a new vehicle, you can also claim the work-related proportion of the GST on the purchase price.
You have two options to calculate the work-related portion under this method:
- Using a logbook as explained above to calculate the percentage of the vehicle’s kms that are work-related.
- Claiming up to 25% of all vehicle expenses – just as though you would if 25% of the car’s kms were work-related. You could still be asked by the IRD to justify the percentage claimed.
Select which option you will use to identify the work-related portion, then apply the following calculation:
Actual costs x Work-related portion or 25% = Claimable cost
For example, if over the course of the financial year you have spent $25,000 in actual costs on a vehicle, and the 90-day logbook shows that 70% of the vehicle’s use is work-related:
$25,000 x 70% = $17,500
If you also bought the vehicle in the financial year, and paid a total of $5,000 in GST on the purchase price, you can, in this example where 70% of the vehicle use is work-related, claim a deduction of 70% of the GST amount as well.
GST amount x work-related portion = GST deduction
$5,000 x 70% = $3,500
METHOD TWO: The Kilometre Rate method
In this method, you will use per-km rates and your logbook to calculate the total that you can claim for your vehicle’s business use.
There are two rates:
- Tier one rate: intended to cover your vehicle’s fixed and running costs. Apply this rate to the business portion of the vehicle’s first 14,000km in the financial year
- Tier two rate: this lower rate is intended to cover only running costs. Apply it to the business portion of the vehicle’s travel beyond the first 14,000km in a year.
Rates are below for the most recent income year, 2020/21. The IRD will publish the 2021/22 kilometre rates after the tax year ends, usually by May – check under ‘Vehicle expenses’ on the IRD site for previous years’ rates and to see the new rates when they are available.
|Tier one||Tier two|
|Intended to cover:||Fixed and running costs||Running costs|
|Applies to:||Business portion of first 14,000km||Business portion of travel beyond 14,000km|
|Petrol / diesel vehicle:||$0.79/km||$0.27/km|
|Petrol hybrid vehicle:||$0.79/km||$0.16/km|
To calculate your deduction, work out and add together the deduction for each tier:
(Total km x your vehicle’s tier-one rate) x work-related portion = Tier-one deduction
(Total km x your vehicle’s tier-two rate) x work-related portion = Tier-two deduction
For example, if your diesel vehicle travelled a total of 30,000km (both personal and business) over a financial year, and your 90-day logbook showed 60% business use:
Tier one: (14,000km x $0.79) x 60% = $6,636
Tier two: (16,000km x $0.27) x 60% = $2,592
Total deduction amount = $6,636 (Tier one) + $2,592 (Tier two) = $9,228
You do not need to consider GST and the rates include vehicle depreciation, so don’t claim a separate depreciation deduction for the vehicle.
Claiming work-related car expenses doesn’t have to be difficult – but making the calculations simple requires diligence, an accurate logbook and clear expense records.
This article was originally published in February 2020 and has been updated for the most recent income year, 2020/21.
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