Anyone who runs a small business in New Zealand will know that the prevailing tax laws are usually far from clear. There are often numerous ways or approaches to deductions, one of which is motor vehicles. Mastering the art of tax deductibles can give your business the edge in the market with extra cash to re-invest. Make sure you are not paying too much for your small business insurance , get the protection you need for the cost you can afford.
The good news is that you may be able to deduct the entire cost of operating your car as a business expense if you solely use it for work. However, if you use your vehicle for both business and personal purposes, you can only deduct a portion of the overall costs.
As such, it’s crucial to keep a logbook in order to precisely determine and support the percentage of vehicle use that is related to work to Inland Revenue (IRD).
However, the challenge is actually keeping a diary. It’s time-consuming and something that is readily overlooked by busy business owners.
However, the reality is that most business owners only need to maintain a logbook for 90 days straight, and that logbook is good for three years as long as the use of the vehicle for commercial purposes hasn’t changed by more than 20%.
Once your logbook is organised in IRD form, you have two options for calculating expenditure deductions for sole proprietors or partnerships: the “Actual Costs” technique and the “Kilometre Rate” method. Both of these are discussed in more depth below.
Fringe benefit tax (FBT) laws and judgments may be more complex if you own and operate a small business with shareholder-employees, so you should get professional tax guidance if that applies to you.
How to Keep a Logbook for Tax Purposes in New Zealand
Even though maintaining a logbook won’t be particularly rewarding for your profession, it can offer small business owners vital information and tax advantages.
Use the IRD template or, if you’d rather, track your vehicle usage using a smartphone app that offers the necessary capabilities for a vehicle logbook or mileage tracker.
When it comes time to calculate, having digital documents will make your life simpler.
According to the IRD, the following information should be entered in your logbook:
- The commencement date and the odometer reading of the car on that day
- The time, location, and rationale for each work trip.
- The date and odometer reading of the car on the last day of the 90-day term.
*Please note, in some circumstances, the IRD may require further information to comprehend your logbook and claim.
Once you have created an accurate logbook, you can calculate the overall mileage of your car as well as the mileage you’ve covered for work as follows:
Percentage of time spent driving for business = (Distance travelled on business / Total distance travelled) * 100
For instance, your formula would be as follows if you travelled 350 kilometres over the course of 90 days, of which 200 km were for business:
(200/350) x 100% is 57%
How to proceed without a car logbook
If you did not keep an accurate logbook, all hope is not lost.
In some situations, you may be able to get away with having a work diary that contains the correct information about business meetings you attended away from the office; you’ll just have some tedious math to do.
You will have to resort to using Google Maps to calculate the distances between those business meetings’ addresses in a spreadsheet. Therefore, you may essentially utilise a journal to keep a log of your work trips.
There are two ways to figure out how much you can deduct: Actual Costs or utilizing the Kilometre Rate.
The approach you choose will depend on the specifics of your company.
Despite the fact that you don’t need to retain as many receipts with the Kilometre Rate technique, the Actual Cost method could more accurately depict a vehicle’s depreciation, particularly if you haven’t driven a lot of miles in a year.
Depreciation, which can account for 20 to 30 percent of a vehicle’s purchase price in the first year, is sometimes a significant expense that is not taken into account by the Kilometre Method. Here is an overview of the two methods.
Method One: The Actual Costs Approach
In order to deduct the portion of car operating expenses that are relevant to your job, you must keep track of all vehicle operating expenses, not just those that are directly related to your job.
This necessitates maintaining thorough records and proof of all of your vehicle-related expenditures throughout the course of the year (not just for the 90-day logbook period), such as all gas, oil, warrant of fitness, repairs and maintenance (including tyres), insurance, registration, tolls, and parking.
When you buy a new car, you can deduct the portion of the GST on the purchase price that is connected to your line of employment.
Under this approach, you have two ways to determine the portion connected to work:
- Calculating the proportion of the vehicle’s kilometres that are related to work by using a logbook as previously described.
- Claiming up to 25% of all vehicle expenses, just as if 25% of the car’s miles were used for business.
The IRD could, nonetheless, require you to defend the proportion you stated.
Choose the method you’ll employ to determine the portion that relates to your job, then perform the following calculation:
Actual costs x the 25% work-related share equals claimable costs.
For instance, if your real vehicle costs were $32,500 over the course of the fiscal year and your 90-day logbook reveals that 40% of your driving is for business purposes:
40% of $32,500 equals $13,000
In this example, where 40% of the vehicle use is related to employment, you can also claim a deduction of 40% of the GST amount if you also purchased the car during the financial year. Let’s say your car cost you $5,000:
GST deduction = GST amount x work-related part
40% of $5,000 equals $2000
METHOD TWO: The Kilometre Rate
When you use this approach, you’ll figure out how much you may deduct for business usage of your vehicle overall using your logbook and per-km rates.
Two tariffs are available:
Tier one rate: Designed to cover the fixed and ongoing expenses of your vehicle.
Apply this rate to the first 14,000 kilometres of the vehicle’s financial year’s commercial mileage.
Tier two rate: This less expensive rate is mainly meant to pay operating expenses.
Use it for all miles driven for business purposes over the first 14,000 in a calendar year.
The rates for the most current income year, 2020/21, are listed here.
Check the IRD website’s “Vehicle costs” section for past years’ rates and to see the new rates when they become available. The IRD will release the 2021–2022 kilometre rates after the tax year finishes, often by May.
Don’t claim a separate depreciation deduction for the vehicle because you don’t need to account for GST and the rates already include vehicle depreciation.
Claiming car expenditures for work doesn’t have to be challenging, but making the calculations straightforward takes effort, a precise logbook, and transparent expense records.
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