Business vehicles can have tax benefits but it’s important to set them up right. Diprose Miller Associate, Anthony Gray, looks at the golden rules around work-related vehicles.
Much as we’d all like it to be simple, the tax rules around business vehicles are confusing for many taxpayers. Add to that the recent changes that provide an alternative option for vehicles owned by companies and it’s time to delve into the ins and outs of running a vehicle for your business.
Taxing your vehicle
The incorrect tax treatment of vehicles is a fertile area for Inland Revenue during the audit process. Many taxpayers make a token effort to comply and this can lead to expensive adjustments being required across a number of tax types.
We’ve noted a few golden rules below, but there’s no substitute for taking the time to get good advice at the time the vehicle is purchased, particularly if the vehicle is to be owned by a company.
Fringe benefit tax
Vehicles that are made available to employees (including shareholder-employees of companies) for private use will be subject to Fringe Benefit Tax (FBT). It’s important to note the vehicle does not actually have to be used privately by the employee, it only needs to be available.
It’s also well-established that travel from work to any employee’s home (even to securely garage the vehicle) is generally considered to be private use.
A vehicle can be exempt from FBT for any days that it fits the definition of a “work-related vehicle”. The following four criteria must all be met:
- It must not be a car (a double-cab ute is not a car).
- It must be conspicuously and permanently sign-written.
- It must not be available for private use other than incidental to business use.
- There must be regular checks made to ensure employees are correctly complying with these restrictions.
If a vehicle is subject to FBT, the expenses of that vehicle (including running costs, depreciation and interest on funds borrowed to purchase the vehicle) will be deductible. GST will also be claimable where it is charged.
Apportioning expenses
If the vehicle is not owned by a company and is used privately by an owner of the business, expenses relating to the vehicle must be apportioned between business and private use. A log book approach is common. A business use calculation, based on a log book kept for a period of three months of typical use, can be used for a three-year period. Other options for claiming include a “per km” rate based on published average costs of owning and operating a vehicle.
A recent change allows “close companies” (five or fewer shareholders) to elect to adopt the log book approach rather than comply with the FBT regime, but this can only be done with vehicles purchased on or after 1 April 2017 (or first used for business purposes after this date).
If you have a business vehicle, make sure it is taxed correctly. At Diprose Miller, we can help ensure you’re getting mileage for your tax return. Contact your Diprose Miller advisor for more details.