Does complying with complex tax rules for motor vehicles drive you crazy

Tax Alert - February 2017

By Robyn Walker and Brad Bowman

As reported in our December 2016 Tax Alert, business tax simplification measures are a step closer after the report back of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill (“the Bill”).  A number of these measures are targeted at reducing compliance costs faced by businesses, particularly small and medium-sized businesses. 

This Tax Alert article will specifically look at measures aimed at simplifying the complex rules around motor vehicles.  We will also touch on a few other compliance saving measures for small and medium businesses.

Motor vehicle expenditure

Under existing motor vehicle expenditure rules, sole traders and partnerships are able to claim tax deductions for the business proportion of the running costs of a motor vehicle.  Companies however are able to claim all motor vehicle expenses as a tax deduction but must pay fringe benefit tax (“FBT”) if the vehicle is available for private use.  The requirement to pay FBT can overtax the business relative to just denying a deduction for the private portion of the vehicle use. 

Proposals included in the Bill will extend the current motor vehicle expenditure rules to close companies providing 1 or 2 vehicles to shareholder-employees and no other fringe benefits.  As a result, a close company will be able to elect to apply the motor vehicle expenditure rules with a resulting denial of the deduction to the extent the motor vehicle expenditure relates to the shareholder-employee’s private use. 

This means, instead of registering for and paying FBT, close companies can deduct motor vehicle expenditure in accordance with the proportion of business use, which can be calculated using actual records, a logbook or in accordance with Inland Revenue’s mileage rates. 

Before celebrating too much, the election to apply the motor vehicle expenditure rules (instead of the FBT alternative) can only be made for motor vehicles acquired by taxpayers after the beginning of the 2017-18 income year or when a motor vehicle is first used as part of the taxpayer’s business after the same date.  It is important to note that no other fringe benefits can be provided by the business, which may be a tough test to meet.  Once an election is made, it will continue to apply until the close company either disposes of the motor vehicle or stops using it for business purposes.

In addition to the above proposal, the Bill also includes amendments to the “per kilometre rate method” for determining motor vehicle deductions.  Under this method, instead of deducting the actual costs incurred (or a portion of them), a taxpayer can deduct a fixed amount per kilometre travelled for business purposes based on rates published by Inland Revenue. 

Currently this method is limited to taxpayers whose business travel is 5,000km or less in the income year.  This 5,000km or less requirement is set to be removed and replaced with an election requirement.  This election would be made via the taxpayer’s income tax return.  The election is irrevocable and would apply to all income years until the taxpayer disposes of the motor vehicle.

This proposal also applies from the 2017-18 income year. 

Other compliance saving proposals that you should be aware of

The Bill includes a number of other compliance saving proposals (a few of which are outlined below).  These proposals generally apply from 1 April 2017 or the beginning of the taxpayer’s 2017-18 income year.

  • The self-correction threshold is set to increase to $1,000 (previously $500).  This means minor errors of less than $1,000 in tax can be corrected in the taxpayer’s subsequent return (whether it is income tax, GST, FBT or another tax), which has the effect of eliminating the need to request the Commissioner to correct the error.  This will also eliminate potential penalties and use of money interest.  Note: our article on proposals to modify the Tax Administration Act 1994 includes details on further improvements to this rule.
  • Under current RWT rules, taxpayers may be required to renew their certificate of exemption annually.  Proposals seek to require Inland Revenue to issue RWT exemption certificates for an unlimited period.  This should eliminate compliance costs associated with renewing these certificates.
  • The annual FBT threshold is set to be increased from $500,000 to $1 million of PAYE/ESCT.  This means more taxpayers would qualify for annual rather than quarterly FBT returns.
  • The 63-day employment income rule is set to become optional.  Taxpayers who do not wish to incur the compliance cost involved with tracking payments paid within 63 days of the end of the income year will not have to and can simply claim a deduction for expenditure paid within the income year.

Deloitte comment

We welcome the changes included in the Bill.  These changes are appropriately targeted at areas where taxpayers currently incur significant compliance costs for very little return.  We are particularly pleased to see pragmatic and logical changes with respect to the complex tax implications of providing motor vehicles to shareholder-employees.  Changes included in the Bill are likely to result in reduced compliance costs for businesses, particularly small and medium-sized businesses.

If you have any question in relation to this article, please contact your usual Deloitte advisor.

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