A self-employed person that uses a motor vehicle privately and in their business, needs to apportion running costs for the motor vehicle between business and private use. The apportionment can be based on actual costs or the kilometre rate method. The kilometre rate method replaces the mileage rate method for the 2017-18 and later income years. Some close companies can use the kilometre rate method as an alternative to paying FBT on motor vehicles, provided to shareholder-employees
The Inland Revenue Department has released an operational statement explaining how the kilometre rate method works and setting out the kilometre rates for the 2017/18 income tax year. IRD notes that an election to use the kilometre rate method for a motor vehicle is irrevocable, meaning the taxpayer cannot change to using actual expenditure for that vehicle in a later year.
A taxpayer wanting to use the kilometre rate method must keep a record of not only business trips, but of the total kilometres travelled by the vehicle in the year. A taxpayer must keep a logbook, diary, calendar, or other “suitable” record of business travel and total kilometres travelled.
For the 2017-18 income tax year, the Tier One rate applies to the business portion of the first 14,000 of business and private kilometres the motor vehicle travels during the income year. The Tier Two rate applies for kilometres travelled during the year in excess of 14,000 kilometres. For the 2017-18 income year the Tier One rate for petrol, diesel, petrol-hybrid, and electric vehicles is 76 cents per kilometre. The Tier Two rate for petrol and diesel vehicles is 26 cents per kilometre, for petrol-hybrid vehicles 18 cents per kilometre, and electric vehicles 9 cents per kilometre.
The Operational Statement also considers the reimbursement of employees for using their private motor vehicle for their employer’s business. Employers may reimburse based on the actual expenditure or on a reasonable estimate of expenditure the employee is likely to have incurred. The Commissioner considers that the use of the kilometre rate method will result in a reasonable estimate. However, if the employee does not keep a logbook or other suitable records of the distance the motor vehicle travels (both business and private), the employer can only use the Tier One rate to reimburse the first 3,500 kilometres of business related travel; the employer must use the Tier Two rate to reimburse business travel in excess of 3,500 kilometres. Where the employee keeps suitable records, the employer can use the Tier One rate up to the 14,000 kilometre threshold.
Talk to your Crowe Horwath adviser to find out if you can use the kilometre rate method.
Technical Director – Tax Advisory