Deducting Vehicle Expenses - What You Should Know As An NZ Business Owner

Why Deducting Vehicle Expenses Is Important For NZ Businesses

Understanding your business’s expenses is important, as they can be deducted from your taxable income. Day-to-day taxable expenses for your business can include costs like paying wages or advertising your products.

If you use a vehicle purely for your business, then you can claim that vehicle’s expenses as business expenses. Purchasing a vehicle for business allows it to be classified as a business asset, which can provide tax benefits such as depreciation deductions. This can include costs for fuel, maintenance and so on. However, if you use a vehicle for both personal and business matters, you will need to work out the costs so you can correctly file your vehicle expenses.

When considering deductible expenses, it's important to distinguish between capital expenses, such as purchasing a vehicle (which are depreciated over time), and revenue expenses, such as fuel and maintenance (which are fully deductible in the year incurred).

Deducting vehicle costs is essential because, for many businesses, vehicle expenses are a major operational cost. If you use a vehicle for business, such as cars or trucks to make deliveries, reach clients, pick up supplies and so on, the money you spend on fuel and maintenance can eat into your profits.

Deducting these expenses can help you financially by:

Reducing Taxable Income. This could lower your taxes, giving you more money to funnel back into your business.
Improve Bottom-Line Profitability. The more profits you make, the quicker you can make upgrades and grow your company.
Enhancing Cash Flow. As we all know, cash flow is vital for any kind of business.

The Key Methods We Can Use To Claim Vehicle Expenses: Actual Costs Method

Of course, it’s vital that you accurately track your vehicle expenses to ensure full compliance with IRD regulations, avoiding issues and costly penalties. We at Business Like can assist with the following methods to ensure you have accurate data about your business vehicle usage:

Using A Logbook For Mixed-Use Vehicles. A logbook tracks the usage of your vehicles and is especially useful if you use your vehicle for both business and personal use. Tracking the actual use of the vehicle (business vs private usage) is essential to determine the business percentage and actual business use percentage for tax purposes, which directly affects your ability to claim expenses and GST. The logbook also helps calculate the business proportion of vehicle use and is essential for determining the actual business use percentage.

Using this logbook method, you should keep track of your personal and business vehicle expenses for 90 days. This should include the purpose and distance of each trip. Then, you can calculate the percentage of business use versus personal use. The business-use percentage then determines the deductible portion of expenses for fuel, maintenance, insurance and depreciation loss. The calculated percentage is then valid for three years. If the business use percentage changes or there are changes in the use of the vehicle during the income year, you may need to make further adjustments.

Claiming Costs For Business-Only Vehicles. If your vehicle is only for business use, then you do not have to keep a logbook or track the percentages of personal and business use. Instead, you should thoroughly track expenses like fuel, repairs and so on. If the vehicle is used solely for business purposes, you can claim the full running costs and running costs as business expenses. It’s strongly advised to keep a separate vehicle for personal use to simplify compliance and to maintain clear records to demonstrate that your business vehicle is never used for personal matters. The cost price of the vehicle is used to calculate GST and fringe benefit tax, and the gross laden weight may affect eligibility for certain tax exemptions.

Mileage Rates for Personal Vehicles Occasionally Used For Business. If you mainly use your vehicle for personal trips but sometimes use it for business, then you may still be able to deduct some vehicle expenses. You can do this by tracking the kilometres you use for your business trips and then applying the IRD’s per-kilometre rate. This is known as the kilometre rate method, which simplifies record-keeping and eliminates the need to consider GST on vehicle expenses. When using the kilometre rate method, you cannot claim depreciation separately because it is already included in the rate, and no GST claim is available under this method. You can then calculate your deductions by multiplying the mileage rate by your total business kilometres. If you reimburse employees for business travel using kilometre rates, it is important to keep accurate records of the business travel and reimbursement.

Depreciation Of Business Vehicles. Vehicles depreciate over time, and this depreciation can be claimed on your taxes. There are two methods to calculate depreciation: diminishing value and straight line. You can follow the IRD’s rates for vehicle depreciation to spread the cost of a vehicle over its useful life. Depreciation loss can be claimed based on the business proportion of use, but you cannot claim depreciation separately if you use the kilometre rate method.

GST Deductions For Vehicle Expenses. GST-registered NZ businesses can claim GST on vehicle expenses as well. Make sure that you only claim business-related GST - if you have a mixed-use vehicle, you can only claim the business-use portion of GST. The process of claiming GST involves separating the GST portion from expenses, using the GST inclusive price, and claiming GST in the correct GST return period based on the business use percentage. The actual cost method requires separating GST from expenses and applying the business use percentage for claims. It is important to include vehicle expenses and GST claims in the correct tax return, tax returns, and income tax return, and to maintain accurate record-keeping.

Work-Related Vehicles and Other Considerations. Work related vehicles must meet specific requirements, including permanent company branding, restrictions on private usage, and documentation of travel related to business purposes. Self employed people and sole traders can claim expenses for motor vehicle use, business travel, and work related expenses, provided they have proper documentation. Shareholder employees in close companies must document the use of the vehicle and apply tax rules for business and private use. Claiming vehicle expenses can help reduce your tax bill by lowering your taxable income.

Private Use of Vehicles: What You Need to Know

When it comes to vehicle expenses, understanding the difference between business use and private use is crucial for accurate income tax deductions. Private use of a motor vehicle includes any trips for personal reasons—such as commuting to your regular workplace, running errands, or family outings. If your vehicle is used for both business and private purposes, you must allocate costs correctly to ensure you only claim the business portion of your motor vehicle expenses.

The actual costs method or the logbook method are both effective ways to determine the business use percentage of your vehicle expenses. By tracking your trips and recording the purpose of each journey, you can calculate the proportion of motor vehicle expenses that relate to business use versus private purposes. This is especially important for sole traders and shareholder employees, as Inland Revenue requires clear evidence to support your income tax deductions.

Failing to separate private use from business use can lead to incorrect claims and potential issues with Inland Revenue. To stay compliant, always keep detailed records and use the actual costs method or a logbook to allocate costs correctly. This ensures you maximise your allowable deductions while avoiding any tax complications related to private use of your motor vehicle.

Record Keeping for Business Vehicle Expenses

Accurate record keeping is the foundation of successfully claiming business vehicle expenses. To support your income tax deductions, you need to maintain detailed and organised records for every business vehicle you use. This includes keeping a vehicle logbook to track all business trips, recording odometer readings at the start and end of each tax year, and saving receipts for fuel, repairs, insurance premiums, and other motor vehicle expenses.

A well-maintained vehicle logbook is essential for calculating the business use percentage of your motor vehicle expenses, especially if your vehicle is used for both business and private purposes. In addition to your logbook, keep all relevant bank statements and invoices to substantiate your business expense claims. These accurate records are vital not only for income tax purposes but also in the event of an Inland Revenue audit.

By keeping thorough and up-to-date records, you can confidently claim the correct amount of motor vehicle deductions, ensure compliance with Inland Revenue requirements, and avoid any disputes over your business expenses. Good record keeping also makes it easier to track your business trips and manage your business vehicle costs throughout the year.

Company Vehicle Ownership and FBT: Tax Implications

Owning a company vehicle can offer convenience and flexibility, but it also comes with important tax considerations—particularly when it comes to Fringe Benefit Tax (FBT). FBT is a tax applied when employees, including shareholder employees or sole traders in a close company, receive a benefit from the private use of a company vehicle. This includes any non-business use, such as commuting or personal trips.

The amount of FBT you need to pay depends on factors like the value of the company vehicle, the extent of private use, and the method you use to calculate FBT. Inland Revenue requires businesses to keep accurate records of both business use and private use to determine the correct FBT liability. This means tracking when the company vehicle is used for work-related purposes versus private activities.

For close companies and sole traders, understanding the FBT rules is essential to avoid unexpected tax bills and ensure compliance. Make sure you document all business journeys, keep detailed logs of private use, and retain supporting evidence for your calculations. By staying on top of your record keeping and understanding your FBT obligations, you can manage your company vehicle expenses efficiently and stay compliant with Inland Revenue regulations.

Optimising Your Tax Strategy With Business Like Income Tax Return

We understand that tax regulations and deductibles can be rather complex, which is why we at Business Like are here to help. Our tax specialists can strategise with you to maximise your deductions and more when it's time to pay your taxes.

Are you interested in deducting your vehicle expenses? Consider calling us on 09 262 0726 or using our contact page to reach us.

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