Can my business claim motor vehicle expenses?

You’re not the only one asking! Everyone wants to claim as much as possible when using a vehicle for business purposes. In response, Inland Revenue is doing its best to reduce the expenses you can claim.

We want to make sure our clients always claim the right amount.

Sole traders and partnerships

If your vehicle is used solely for business purposes, all motor vehicle expenses (fuel, maintenance, servicing, insurance, WOFs, replacement tyres, and similar) can be claimed as expenses.

The kicker is…business purposes doesn’t include school drop-offs, going to the supermarket, or even travelling between home and work. The only exception is when your home also acts as your office.

When a sole trader or partnership chooses to use a business vehicle privately, the costs need to be separated.

Keeping a logbook

A logbook for tax purposes must record all travel over 90 days. It notes the distance, date, and reason for each trip. This information lets us calculate the proportion of use allocated to the business, and we can choose one of two methods:

For the first 14,000km travelled, claim $0.95 per business kilometre. A lower rate gets applied to additional kilometres (and is different for diesel, petrol hybrid and electric cars)
Using your logbook, apply the percentage of business travel to all vehicle expenses incurred. If 70% of your travel is for business purposes, 70% of fuel, a WOF, depreciation, interest on vehicle loan, or a service can be claimed as a business expense

Assuming your travel habits don’t change significantly, your logbook can be valid for up to three years.

There’s also some good news about logbooks. While you can still find a template on the IRD’s website, you can digitise the whole process with an app to save time. You may want to check out Driversnote and this review of other great apps for small businesses.

No logbook

If you don’t keep a logbook, the maximum you can claim is up to 25% of all vehicle expenses, including depreciation and interest on vehicle loans.

How to account for this adjustment

Don’t worry a bit about this. At Traktion, we’re not just accountants, we are action heroes. We’ll take care of this for you at the end of the financial year when we prepare your end of year accounts. You can always shout out to us if you would like the adjustment to be made more regularly. Contact us here.

Company structures

The above methods are available to companies in certain situations (see below).

Bringing the vehicle in as a business asset

If the vehicle was purchased from a third party, it is recorded at its purchase price. However, if purchased from a related party (yourself as shareholder, your mother, aunt, mate), then you need to work out the market value. The easiest way is to look in Auto Trader or TradeMe Motors for a vehicle with the same year, make and model, and similar condition. We can use the advertised price as its market value or we recommend engaging an external asset valuer such as Asset Valuations.

Adjusting for private use

If a shareholder uses the vehicle for private use, this is a benefit they’re receiving and must be recorded in the company’s financial statements. We call it a benefit because the shareholder doesn’t need to purchase a car for themselves, and in most situations we see, the company pays for all vehicle expenses.

In a real-world situation, nobody would give the use of a car for free. And it’s the same for companies because they’re a separate legal entity, distinct from you. You and the company are not the same person, even though it may feel at times that you are!

Reimbursing the company

Calculation

Companies must first apply the default option – you may see it called “Motor Vehicle Reimbursement”, Private Use Adjustment, “Motor Vehicle Reimbursement” or something similar.

We calculate the reimbursement based on 20% of either the vehicle’s cost or its book value (if less than $8,000) and the number of days it’s available for private use. The reimbursement is then recorded as a separate income line in the company’s financial statements. It’s considered income because the company is receiving compensation from its shareholder for using the vehicle.

It’s important to understand the concept of availability. Shareholders reimburse the company for any day that the vehicle is available to them. A simple way of thinking of this is – if the vehicle is on your property or parked close to home and you have the keys, it’s probably considered available.

Exceptions to this rule could apply if:

A vehicle serves a specific function and not designed to take passengers – a van for example
The vehicle shows prominent branding which can’t easily be removed
A shareholder having a second or third vehicle to use privately
The company informs the shareholder, in writing, that the vehicle cannot be used privately, and that it will conduct regular checks to confirm this is being followed
The company formally opts out of this FBT method by informing Inland Revenue (in writing and in the first year the vehicle is used in the company) that you intend not to follow these FBT rules for motor vehicles – you can then have the same options as sole traders and partnerships above.

How to account for this adjustment

Back in the dark ages (well, before 2018), the private use of the vehicle had to be worked out by the company, and the company had to file an annual or quarterly FBT return and pay the calculated amount to Inland Revenue. Such was the burden of red tape on small and medium sized companies that Inland Revenue implemented a new system.

For companies with fewer than five shareholders, an adjustment is made at the end of each year and recorded directly as income in the financial statements. We can make this adjustment monthly if you prefer.

Do I have to pay cash?

No. When your accountant makes the adjustment, the transaction is recorded through your Shareholder Current Account. In effect, it increases the amount you owe the company.

An important note is that FBT Reimbursement doesn’t apply to non-shareholder employees. Their benefit falls under the Fringe Benefits Tax (FBT) regime and is accounted for separately.

GST, loans and leasing FAQs

Can I claim GST on a personal vehicle that I use for business?

You can, indeed.

If you’re a sole trader, you can record the vehicle as a business asset. GST can be claimed on its market value at the time the vehicle is introduced to the business

Your company can purchase a personal vehicle at market value and the GST is claimed when transferred.

Does the business need to pay cash when the vehicle is ‘purchased’?

No cash needs to change hands at all. Just let your accountant know and we’ll enter the information into Xero for your next GST return.

How much GST can I claim if I borrow to buy a vehicle?

You can claim all of it up-front. In fact, some lenders will require that you use your GST refund to repay part of the loan.

Again, just provide us with the sale and purchase agreement and your financing arrangement. We’ll enter it into Xero and make sure the full purchase price is picked up in your next GST return.

Are my loan repayments a business expense?

They aren’t. The payments are going towards reducing your loan balance. However, we can claim the interest on the loan for business purposes. We make this adjustment when we prepare your financial statements.

What happens when I sell a business vehicle?

If you’ve claimed GST on the purchase price, you need to declare it on the sale price
If the sale is to yourself or a related party, you’ll need to know its market value (you’re not allowed to sell it to yourself for $1)
Tax must be paid on any profit from the sale
Your asset needs to be removed from the fixed asset register. However, it’s best you leave that to us
If the proceeds from the money don’t go through your Xero bank account, you just need to provide us with the sale price, and we’ll take it from there

Is it smarter to borrow money to purchase a vehicle, or lease one instead?

It depends.

If you borrow:

The vehicle belongs to you or the company, assuming you meet the loan conditions
GST can be claimed on the full purchase price
It’s an asset, and we will depreciate it as an expense over a number of years
The loan repayments are not deductible, but the interest portion is

When leasing a vehicle:

In nearly all cases, the vehicle doesn’t belong to you or the company.

It’s not a business asset, so we can’t depreciate it.

You can claim GST on each payment.

The lease payments are fully tax deductible.

What is my best option for tax purposes?

That’s one we can’t answer without knowing more about you and your business. You need to consider the impact on your cashflow, available finance options and personal preferences.

Conclusion

We recommend you discuss the options when it comes to claiming motor vehicle expenses. You don’t want suddenly find out that 75% of your expenses cannot be claimed (sole traders) or that the company has more taxable income (FBT Reimbursement).

Managing your expectations and keeping you on the right side of tax laws is a must for us at Traktion. Get in touch with one of our advisors or accountants and see how we can put your mind at ease.