Proposed “Simplified Calculation” of Deductions for Dual Use Vehicles and Premises

For more information on these changes, contact our taxation team

Brad Phillips

Principal

03 211 3782

021 317 151

bradp(at)mdp.co.nz

Craig McCallum

Tax Advisor

03 928 5158

027 698 9511

craigm(at)mdp.co.nz

Kathryn Ball

Consultant

03 211 3774

027 454 8414

kathrynb(at)mdp.co.nz

Proposed “Simplified Calculation” of Deductions for Dual Use Vehicles and Premises

Vehicles

Under existing legislation, taxpayers may keep a logbook for a three-month representative test period to determine a vehicle’s proportion of business use for the next three years. This proportion then determines the percentage of actual vehicle costs that can be claimed as an income tax deduction.

Recent legislation proposes an optional method in determining vehicle deductions on a per-vehicle basis. This method provides for a flat dollar per kilometre rate based on a log book business use percentage instead of recording actual costs.

The rates will be:

  • set by reference to industry figures, and based on the average per kilometre costs for the average vehicle;
  • divided into 2 tiers.

  • The first tier will provide for the recovery of both the vehicle’s fixed costs and its per kilometre costs. The second tier will provide for the recovery of the per kilometre costs only (as the fixed costs of vehicle ownership would be over-deducted with increasing usage if a single fixed rate was used); and

  • published by Inland Revenue and updated each year to ensure the rates are accurate.

  • This method would apply for the 2018 and later income years.

    Below is an example on how the optional method would work.

    Example 1 Mr Smith is a real estate agent who uses his personal car for business purposes. Mr Smith buys a new car and elects to use the per kilometre method to calculate his income tax deductions when he files his tax return. Mr Smith has kept a log book for the first three months of the year, which shows a proportion of business to total kilometres of 55%. Over the entire year Mr Smith has driven 30,000km.

    The rates that Inland Revenue has published are 75 cents per km for the first 10,000km and 25 cents for every km thereafter (these rates are indicative only).

    Proposed “Simplified Calculation” of Deductions for Dual Use Vehicles and Premises

    Mr Smith needs to calculate his deductions for each tier of rates, and then add them together.

    The formula to calculate his deductions for each tier is: Total kilometres travelled (to which the tier applies) x business proportion x tier rate

    Applying this formula, Mr Smith makes the following calculations:

    First tier: 10,000 km x 55% business use x $0.75/km = $4,125 Second tier: (30,000 total km – 10,000km) x 55% business use x $0.25/km = $2,750

    Adding the results for each tier together gives $4,125 + $2,750 = $6,875.

    Therefore Mr Smith could claim an income tax deduction of $6,875.

    Premises

    Similar to the above rules, an optional alternative method for calculating the income tax deductions for premises that are used for both business and personal purposes has been proposed (i.e. home office claim).

    This proposed method requires the taxpayer to first calculate the area of the building (in square metres) that is both separately identifiable and used primarily for business purposes. This area is then multiplied by a single rate to give the first amount of the deduction. The rate will be: • set by Inland Revenue, based on the average cost of utilities per square metre of housing, but excluding mortgage interest and rates or rent;

    • updated each year; and

    • reasonably accurate for most taxpayers.

    Taxpayers using this method will then be able to claim a second deduction for their actual mortgage interest, rates or rental costs. This second deduction is calculated by multiplying the amount of these actual costs by the above business use percentage.

    If this method is used no further deductions can be made for the relevant premises.

    The rationale behind the introduction of this optional method is that it is intended to simply the claiming of income tax deductions for premises by removing the need to keep a record of actual expenses.

    This method would apply for the 2018 and later income years.

    Below is an example on how the optional method would work.

    Example 2 Mr Smith has a room in his house which is set aside as an office. Mr Smith uses the office primarily for business purposes. Mr Smith decides to calculate his income tax deduction for this office using the new method. The office has an area of 10m2, while Mr Smith’s house has an area of 100m2. Inland Revenue has set the fixed rate for premises at $100/m2 (this amount is indicative only).

    Mr Smith calculates his first deduction using the fixed rate. To do this he simply multiplies the area of his office (in square metres) by the fixed rate. Accordingly, Mr Smith’s first deduction is:

    10m2 x $100/m2 = $1,000.

    Mr Smith next calculates his second deduction for his mortgage interest and rates (as Mr Smith owns his house). To do this, he calculates the fraction of his house occupied by his office. He then multiplies his actual mortgage and interest costs by that fraction.

    The fraction of Mr Smith’s house that is occupied by his office is: 10m2 office ÷ 100m2 house = 0.10 (or 10%).

    Mr Smith’s mortgage interest for the year is $20,000 and his rates are $3,000. Therefore Mr Smith’s second deduction is: ($20,000 + $3,000) x 0.10 office fraction = $2,300.

    Adding the two deductions together, Mr Smith has a total income tax deduction for his office of $1,000 + $2,300 = $3,300.

    Accordingly he can claim an income tax deduction for his home office of $3,300

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