**Disclaimer: This blog is intended as a general guide and may not cover all specific situations or reflect the latest legislative changes. For personalised advice that considers your unique circumstances, please consult a qualified tax professional.
Motor vehicle running costs can represent a significant expense for businesses. To address the complexities of separating personal use from business expenses, the IRD provides three main methods to calculate your deductible motor vehicle expenses. Let’s break down each method to help you choose the most cost-effective approach.
Method 1: Public Service Rate (PSR) Method Using a Logbook
Under this method, you keep a logbook for any continuous 3-month period once every 3 years. Your business-related travel, multiplied by the Public Service Rate (PSR), gives you a fixed rate per kilometre for your deduction. The IRD adjusts the PSR annually to reflect the average cost of vehicle use.
Example:
Judy, a physiotherapist, often travels to clients’ locations for work. She maintains a logbook from 1 June 2023 to 31 August 2023, recording 2,700 kilometres of business-related travel. For the full year, she estimates her business travel to be 10,800 kilometres. Using the 2024 PSR of $1.04, Judy’s deduction is calculated as follows: 10,800 km x $1.04 = $11,232. Judy can use this deduction rate for up to three years unless her travel pattern changes significantly. This method is often the simplest and most cost-effective for businesses with predictable travel patterns.
Method 2: Actual Costs Method Using Work-Related Percentage
With the actual costs method, you record all motor vehicle expenses (e.g., fuel, maintenance, insurance) and adjust for personal use based on a 3-month logbook. This method is useful if you have high vehicle costs or your business usage percentage is low.
Example: Continuing with Judy the Physiotherapist: Judy’s logbook shows she travelled 7,000 km in total, with 2,700 km for business. Her business usage percentage is calculated as: 2,700 km / 7,000 km = 38.6% By year-end, her total motor vehicle expenses (including fuel and maintenance) are $11,000. Her allowable business deduction is calculated as: 11,000 x 38.6% = $4,246. Comparing the two methods, Judy finds the PSR method yields a higher deductible amount in this case.
Method 3: FBT (Fringe Benefit Tax) Method for Company-Owned Vehicles
For businesses that provide company vehicles for both business and private use, the Fringe Benefit Tax (FBT) method is often a practical and tax-efficient option. This approach allows the business to include vehicles as business assets and claim related deductions, while accounting for private use by paying FBT on the vehicle’s availability for personal use.
This method is particularly advantageous for businesses with high levels of private use, as the FBT cost is often significantly lower than the total deductions claimed for vehicle expenses. It’s also beneficial for businesses with multiple employees using company vehicles, as it simplifies the process of tracking and accounting for costs like depreciation, registration, and maintenance under a single company policy. By consolidating these expenses, businesses can often optimise tax efficiency while ensuring compliance with IRD regulations.
Note: FBT calculations and filing can be complex, especially for businesses managing multiple vehicles. Consult a tax professional to ensure compliance and to maximise vehicle-related deductions for your business
Summary
Each method has its benefits and specific applications. Choosing the most appropriate one depends on factors such as vehicle usage patterns, business expenses, tax objectives and ease of compliance for you. As always, please consult with us before making major purchasing decisions in your business.