New Vehicle Mileage Rate Methods

When a vehicle is used for both business and private purposes, there are two methods a taxpayer can choose from to calculate a tax deduction for motor vehicle expenditure. These methods do not, generally, apply to companies as motor vehicles owned by a company and available for private use are subject to Fringe Benefit Tax (FBT).

The two methods are the cost method and the mileage rate method.

Cost Method
Under this method, receipts of actual costs incurred are kept. The amount that the person can claim is the business percentage, as established by their vehicle logbook, multiplied by the amount of actual costs incurred. A logbook must be kept for a three month period to establish the business use percentage and is valid for three tax years. If a logbook is not kept then the maximum business use a taxpayer can claim is 25%.

This is the default method.

Mileage/Kilometre rate method.
An alternative to the cost method was the mileage rate method. Previously, the mileage rate method multiplied a cents per kilometer rate set by Inland Revenue (73c in 2017 for petrol/diesel vehicles) by the amount of business kilometres travelled by the taxpayer, up to a maximum of 5,000km of business travel for self-employed people.
However, from the beginning of the 2018 income year the mileage rate method was replaced by the kilometre rate method. In using this method, a taxpayer makes an irrevocable election to continue using this to calculate motor vehicle expenditure. The election is made on a vehicle by vehicle basis and is made in the year the vehicle is first acquired. An election may also be made for any vehicle used for business that is held at the beginning of the 2018 income year except where the vehicle is disposed of during that year.

There are two tiers under the kilometre rate method as follows:

For taxpayers who use a log book to record their business use percentage, tier one is for the first 14,000 kms and tier two for any kms travelled above this. This is also the case if no logbook is taken but the total business and private kilometres for the year are known. Where only business travel is known, tier one applies to the first 3,500 kms and tier two thereafter.

Example one - Greater than 14,000 kms travelled - log book maintained:
The taxpayer uses their Holden Commodore 3.6 litre petrol car for both business and private purposes.
The previous log book test period calculates that 60% of the travel is for business purposes.
The car travelled a total of 20,000 kilometres for the 2017/2018 income year.
Deduction:

Tier One 14,000 x $0.76 x 60% = 6,384.00
Tier Two 6,000 x $0.26 x 60% = 936.00
Total deduction $7,320.00

Example two - Greater than 14,000 kms travelled- no log book total km known:
The taxpayer uses their Holden Commodore 3.6 litre petrol car for both business and private purposes.
No log book breakdown or other record of motor vehicle use is maintained. However, it is known that the car travelled a total of 20,000 kilometres for the 2017/2018 income year and at least 25% of this travel was for business purposes.
Deduction:

Tier One 14,000 x $0.76 x 25% = 2,660.00
Tier Two 6,000 x $0.26 x 25% = 390.00
Total deduction $3,050.00

Example three - Greater than 14,000 kms travelled- no log book but business km known
The taxpayer uses their Holden Commodore 3.6 litre petrol car for both business and private purposes.
No log book breakdown or other record of motor vehicle use is maintained. The car is used for business purposes for 8,000km

Tier One 3,500 x $0.76 = 2,660.00
Tier Two 4,500 x $0.26 = 1,170.00
Total deduction $3,830.00

The 5,000km limit for self-employed persons does not apply under the kilometre rate method.

The kilometre rate method can also be used by an employer to calculate the amount of the tax-free allowance payable to an employee for using their private vehicle for work purposes.

Please contact us if you have any questions or wish to discuss vehicle deductions further

Brad Phillips
03 211 3782
021 317 151
bradp(at)mdp.co.nz

Craig McCallum
03 928 5158
027 698 9511
craigm(at)mdp.co.nz


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