Although the tax rules around the private use of motor vehicles have been stable for some years now, other variables can change, such as a person’s circumstances. This makes it worthwhile to regularly revisit how vehicles are accounted for to make sure the most efficient outcome is being achieved.
Most small businesses operate through companies and this lends itself toward owning a vehicle in the company and paying fringe benefit tax (FBT) for non-business use. For shareholder employees, a variation of this is to charge the value of the vehicle benefit to the shareholder’s current account, which arguably eliminates the need to account for the private use of the vehicle for FBT purposes.
In the first couple of years of a vehicle’s ownership, the FBT route is typically the best option economically. This is because the tax benefit of being able to claim depreciation, FBT and the running costs, should outweigh the FBT cost itself.
While within the FBT net, it is important to ensure opportunities to minimise private use are taken advantage of. For example, if an employee does not need to have a vehicle available for their private use 24/7 it may be possible to wholly or partially exclude it. The most common way of doing so is for the vehicle to qualify as a “work related vehicle”. If applicable, home to work and other incidental travel is not treated as private use. To qualify, the vehicle needs to be sign-written, not principally designed to carry passengers, and there be a condition of employment that the employee takes the vehicle home. The question of whether a vehicle has been principally designed to carry passengers or not, has been before the courts in the past. Basically, it is accepted practice that a double cab ute can qualify because they are not “mainly” designed to carry passengers. However, vehicles that are more in the nature of standard passenger carrying vehicles, such as sedans will not qualify, unless they are modified (such as by removing the back seats). Once a vehicle qualifies, appropriate restriction letters can be put in place and the FBT liability reduces.
Once into the third year of ownership, the cost of paying FBT tends to outweigh the benefit of the various deductions and therefore other options should be examined. For example, the vehicle could be sold out of the company to the user (potentially triggering a deductible loss on sale) and instead a tax free reimbursement approach could be taken. This can involve more administrative work because a record of actual travel and expenditure needs to be kept. However, this can be simplified through the use of a three month logbook and mileage rates. The mileage, as per the logbook, can be multiplied against a mileage rate to arrive at an estimate of the work related travel costs.
The current IRD mileage rate for employees is 77 cents per kilometre. Care needs to be taken though as reimbursements for high business use (in excess of 5,000km) can add up and there is a risk of a taxable benefit arising. However, it is possible to calculate your own rate based on your own specific circumstances. As long as the estimate is reasonable, i.e. broadly equates to actual costs, a mileage rate can be used regardless of the amount of business travel. Given a reimbursement of this nature is non-taxable to the employee and deductible to the employer there is a positive net benefit.
Next time you’re filling out your FBT return, spare a moment to run some numbers to consider if there is a better approach, or contact your accountant to discuss what would work best for you.