The mileage rate rules have been replaced with the new Kilometre Rate rules, effective from the beginning of the 2017/18 income year. While the concept is the same, the calculation has changed, and the previous 5,000 km limit no longer applies.
Inland Revenue will set new rates each year as third-party industry data becomes available.
Employee Reimbursement
When an employee uses their private vehicle in their employer’s business, the employer is able to pay the employee a tax-free reimbursement for the actual costs of the business use of the vehicle. This is often difficult to quantify and as an alternative, employers have been able to reimburse employees based on the IRD’s Kilometre rates.
The new Kilometre Rate consists of 2 rates referred to as Tier One and Tier Two.
When a logbook is kept
The Tier One rate applies to the first 14,000 km of business use in an income year, with the rate currently set at 76 cents for all motor vehicle types.
For business use in excess of 14,000 kms, the Tier Two rate applies which depends on the type of vehicle, ranging from 9 cents for electric vehicles to 26 cents for petrol and diesel vehicles, see table below:
Note that even when an employee has correctly recorded a logbook test period of 3 months (which can apply for up to 3 years) it is still necessary to determine the total business use kilometres each year to see if the 14,000 km is exceeded.
When a logbook is not kept
The Tier One rate is limited to the first 3,500 kms of business use, with the Tier Two rates used for kilometres in excess of 3,500 kms in an income year.
2018/19 income year
The Inland Revenue recognises there is a time lag between reimbursement and the rates being set and therefore will allow employers to just use the Tier One rate for employee reimbursement in the 2018/19 income year for all business use. However, from the 2019/20 income year, employers must use the two-tier calculation.
Deductions for Business (self-employed and close companies)
Where a person uses a motor vehicle for both business and private purposes, they can calculate the business use of the vehicle using a log book or actual costs. When the log book method is used, generally the new two-tier Kilometre Rates will apply.
The new Kilometre Rate can be applied to existing vehicles at the beginning of the 2017/18 income year and must then be applied until the vehicle is disposed of.
For newly acquired vehicles, the decision to apply the Kilometre Rate must be made in the first year the vehicle is used in the business, and will continue to apply until the vehicle is disposed of.
If the Kilometre Rate is not chosen for a vehicle, the deductions will need to be based on actual costs for the duration the vehicle is used for business use. It is not possible to switch between Kilometre Rate and actual cost each year.
When the Kilometre Rate is used, there is no additional deduction for depreciation as it has already been factored into the rates.
When a logbook is kept
As for employee reimbursements, the Tier One rate applies to the first 14,000 km of business use in an income year, and the Tier Two rates applies for business use in excess of 14,000 kms (refer table above for rates).
When a logbook is not kept
Again, the Tier One rate is limited to the first 3,500 kms of business use, with the Tier Two rates used for kilometres in excess of 3,500 kms in an income year.