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Vehicle deductions for the Self-employed

The article is supplementary to THIS one which focused on reimbursement of employees for business use of their own motor vehicles.

Part 1 of the Commissioner’s operational statement (OS 18/01) applies to those who wish to calculate the tax deduction for business use of their own vehicles.

A self-employed person must determine the business portion that applies to each vehicle using a logbook, diary, calendar or other suitable method.

You can work out the business use of your vehicle by keeping a logbook for at least 90 consecutive days. After 90 days you can work out the average proportion of business to private use of your vehicle.

The logbook term is up to three years, provided variance of business use is less than 20% of the logbook representation.

The logbook must record the:

  • start and end of the 90-day test period

  • vehicle's odometer readings at the start and end of the test period

  • distance of each business journey

  • date of each business journey

  • reason for each business journey, and

  • any other detail that we may ask you for.

You can use your logbook to calculate the deduction for the costs you incur and the amount of depreciation loss for the business use of your motor vehicle.

A deduction can be made in respect of their actual motor vehicle costs for the business portion. This is known as the cost method. Alternatively, a person may use the kilometre rates set annually by the Commissioner for each vehicle type. This is known as the kilometre rate method.

A person wishing to use the kilometre rate method must make an irrevocable election to use this method. That election will apply until the vehicle is disposed of.

The election must be made on a vehicle by vehicle basis and be made in the year the vehicle is acquired or first used for business purposes. The election to use the kilometre rate method is made by using this method in the person’s return of income.

If no election is made to use the kilometre rate method the person is deemed to have elected to use the cost method. In either case, the election is irrevocable, so a person may not switch back and forth between methods for the same vehicle.

For those required to file a return for business income, the kilometre rates are set retrospectively each year by the Commissioner, so that the rate used in the tax return reflects the average motor vehicle operating costs for the completed income year.

A two-tiered approach applies so that allowable fixed costs are claimed within the first 14,000km travelled. Tier 1 therefore covers the fixed and running costs for the first 14,000km. Thereafter, for higher mileage, the rates are set to cover only the running costs per kilometre.

The rates for the 2018/2019 year are expected to come out in about May 2019. For those who have not yet filed a tax return for 2017/18, the rate table at the bottom of page 12 applies for petrol, diesel, hybrid and electric vehicles.

Where the kilometre rate method is used, the 5,000 km limit to deductions no longer applies and there is also no depreciation deduction or recovery of depreciation as this is taken into account in the rates.

www.ird.govt.nz


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