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New rules for employers reimbursing employees’ mileage costs

Tax Alert - April 2018

By Veronica Harley and Andrea Scatchard

If you are an employer that has been using the Commissioner’s published mileage rate as a reasonable estimate of costs to reimburse employees for the use of their private vehicle, then beware, the rules have changed with effect from 1 April 2018. Essentially, the flat mileage rate has been replaced with a more complicated two-tier set of kilometre rates which potentially means a lot more compliance for employers than is currently the case.

Historically, Inland Revenue has published a mileage rate for use by a self-employed person to calculate the cost of using their private vehicle for business purposes. Inland Revenue has also accepted the use of this mileage rate as a reasonable estimate of costs for employers to use for the purposes of reimbursing employees for using their private vehicle for employment related use. The most recent rate was set at 73c/km for petrol & diesel vehicles, with slightly different rates for hybrids and electric vehicles.

However, the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017 [1] made several small business changes to the rules in subpart DE of the Income Tax Act 2007 which applies to sole traders (and now also eligible close companies who wish to opt out of FBT) who claim tax deductions for the use of their motor vehicle for both business and private purposes. The new rules require such people to choose between using the costs method (which is based on keeping records of actual costs incurred) or a kilometre rate method which has replaced the mileage rate method from 1 April 2018. These changes also affect employers who were using the mileage rate for reimbursement purposes. Inland Revenue is required to set and publish kilometre rates, and has recently published a draft operational statement proposing a tiered rate method.

Under the kilometre rate method, there are two tiers of rates - based on the type of engine (i.e. whether petrol, diesel, hybrid or electric) and size of the engine of the motor vehicle. The first tier will apply to the first 14,000km travelled in the year (inclusive of both business and personal travel) and will represent both fixed costs and running costs. The second tier will represent only the running costs and applies to the business portion of any travel in excess of 14,000km.

Note that when the employee maintains a log book, or there is other evidence establishing the proportion of employment use for an income year, the kilometre method can be used and the tier one rates apply for the first 14,000km. However where no log book or other record is maintained, the use of the tier one rates is limited to the first 3,500km.  

We have a number of concerns about how practical this new method will be for employers.  Further, it is not helpful that the actual set of tier rates have not yet been released (due in late April or May), even though they will apply from 1 April 2018.  The draft statement uses rates in its examples ranging from 53c to $1.03, but these are for illustrative purposes only.

While this new, more complicated system is more likely to accurately capture the costs of running a vehicle, it will also mean more compliance for employers. Currently employers can reimburse employees using the flat rate and can easily understand the tax consequences (if any). Under this new approach, employers will need to know the type of vehicle and total travel for each employee in order to determine the applicable amount of tax free reimbursement. Pragmatically we expect that employers may only offer to reimburse at the lowest available kilometre rate in order to minimise compliance costs, noting that it is currently unclear what the spread of rates will be between small and large vehicles. We understand that these rates will broadly mirror the New Zealand Automobile Association rates which are published annually, although there may be some differences.

The key message for employers who have been historically using the Commissioner’s mileage rate is to consider how practical it will be to comply with the new kilometre rate method.  This decision will depend on the number of employees being reimbursed and how easily the required information can be collected. It may be necessary to consider whether other alternative sources or methods may be preferable in coming up with a reasonable estimate of costs and also whether any of the company reimbursement policies (and employment agreements) need to be reviewed and updated for any changes.

If current reimbursement rates payable to employees cannot be changed, an employer will be faced with the situation where reimbursements to different employees may have differing levels of tax free and taxable components.  The employer will need to decide whether to deduct PAYE from the taxable component, or to gross up the taxable component so that the employee receives the agreed reimbursement amount in the hand. This decision may be driven by the wording of employment agreements or policies.

Where there is a taxable amount included in a particular reimbursement this will need to be fed into the payroll system for reporting purposes – as many employers do not pay expense reimbursements through payroll, this adds another layer of compliance for employers and could require manual changes to each payroll.

It’s perhaps ironic that a well-intentioned small business measure aimed at simplifying dual use vehicle deduction calculations has in the process done anything but simplify matters for employers.

Submissions on this draft operational statement can be made until 30 April 2018 so if you have any comments or would like to provide input for a submission, please contact your usual Deloitte tax advisor.

[1] Enacted on 21 February 2017

 

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