Company Motor Vehicles – Business and Private Use
Previously companies which owned motor vehicles that were available for private use, had limited options for accounting for the private use of the business vehicle. Recently the rules have changed and now if you purchase a vehicle through a company, you have several options on how to account for the private use. The rules have been relaxed somewhat so small closely held companies can now adjust for private vehicle usage on a similar basis to sole traders and partnerships.
Below are brief explanations of the options available now:
Fringe Benefit Tax (FBT) – Under this method the company claims 100% of the costs relating to running the vehicle for tax purposes. 100% of the GST paid is also claimed on the purchase of the vehicle and the running costs. FBT has to be paid on the days the vehicle is available for private use. Sometimes the FBT amount paid can be significant, especially if the original cost of the vehicle is quite high. In addition the days FBT is payable on are the days the vehicle is available for private use, not just the days it is actually used privately. This is the method that has been in existence for many years and will be what a number of you currently use.
Cost Method – Under this method companies can apportion the expenses relating to the motor vehicle between private use and business use. The claim is then only for the portion of the expenses that relate to the business use. A vehicle log book must be completed to establish the portion of business use of the vehicle. The percentage of vehicle expenses that are for private use get put through to the shareholders current account as private drawings. GST is claimed on the business portion of vehicle expenses.
Kilometre Rate Method – Under this method a log book is required to keep a record of all travel undertaken by a vehicle and to determine the kilometres travelled for business use as well as private use. You then multiply the number of business kilometres travelled by the Inland Revenue mileage rates to determine what you can claim. Under this system any actual vehicle costs paid by the company get charged to the shareholder current account as private drawings. No GST can be claimed on the kilometre rate paid on the running costs.
These are just the basics of the three methods and there are other things you need to consider for each of these methods. Options 2 and 3 are the new options and only available where private use of a vehicle is the only non-cash benefit provided to a shareholder-employee of a company. These new options are only available for new vehicles purchased by a company, not currently owned vehicles.
Note: The 3 options above all relate to vehicles owned by the Company. They do not relate to vehicles owned in the individual shareholders name but used for company business. There are separate rules for that.
If you are looking at purchasing a new vehicle through your company, and it will be available for both private and business use, we suggest you give us a call to discuss the various options available and what would be best suited for you.