Statement on reimbursement of mileage costs finalised
Tax Alert - August 2018
By Veronica Harley & Andrea Scatchard
On 4 July 2018 Inland Revenue released its finalised Operational Statement 18/01 - Commissioner’s statement on using a kilometre rate for work related running of a motor vehicle. Readers may recall our earlier article on the draft statement which highlighted real practical issues with the proposals for employers who had historically been using the IR mileage rate to reimburse employees. The earlier draft statement proposed that there be a wide range of rates at which an employer could reimburse employees at for work-related use of a private vehicle. Rates would vary based on engine size, fuel type and annual kilometres travelled. Deloitte strongly submitted against this on the grounds of unreasonable compliance costs being placed on employers.
While the finalised statement is much improved, aspects of it still seem unnecessarily complicated in our view and will require some employers to give some thought to their reimbursement policies over the next year.
The good news is that for the remainder of the 2019 income year, i.e. from the date of the release of the statement on 4 July 2018, employers are able to reimburse employees at a flat rate of 76c/km regardless of distance travelled. This rate is up from the existing 73c mileage rate.
However, for the 2020 income year and onwards it will be necessary to use a two-tiered reimbursement rate. The tier one rate of 76c/km applies to the work related portion of the first 14,000km of combined business and private travel per annum, provided a log book or similar records are maintained by the employee. Our expectation is that records of individual journeys taken, including expense claim systems which link into online mapping systems to calculate distances travelled, will be sufficient to satisfy the requirement of a “log book or similar records”.
The tier two rates apply to travel that exceeds this limit. Practically the 14,000km combined travel limit means most employees will fall within the tier one rate threshold. If the employee does not maintain a logbook or other records, the tier one rate can be used to reimburse a maximum of 3,500km per annum of work related mileage. Many employees will comfortably fall under the 3,500km threshold.
For employers who have employees with typical business mileage over the 3,500KM threshold, it gets more complicated. The statement has simplistic examples which consider the claim from a whole year perspective which is fine in theory. The reality is that employers reimburse employees regularly for mileage claims (e.g. monthly) and so will need to track and determine at what point the tier one threshold is exceeded and the tier 2 rate kicks in. If this is not monitored and the mileage rate paid is above the Tier 2 rate, the additional amount paid to the employee may be taxable with a PAYE obligation for the employer.
Employers will need to think about their reimbursement policies, what records will be required from employees, and how this threshold will need to be monitored. For example, employers could request employees take an odometer reading at the start of each tax year so there is at least some measure of total kilometres travelled in a year and that monthly mileage claims can be assessed against this starting number. This will become more tricky when employees start part way through the year or change vehicles during the year.
The level of mileage reimbursements to employees is usually governed by employment contracts and/or HR policies. These may dictate a level of reimbursement that is linked to IR rates. Where this is the case, employers may be able to update the reimbursement rate to reflect these changes.
Alternatively, the employment contracts or HR policies may prescribe a specific rate for reimbursement. If this is the case, and this rate is higher than the IR rate or rates applying, some part of the reimbursement may be taxable and subject to PAYE.
It may now be time to consider other options. For example, employers could consider using AA rates as an alternative. The law permits the tax free reimbursement of a “reasonable estimate” of actual expenditure and the AA rates are perfectly acceptable as an alternative – it is not compulsory to follow OS 18/01.
Of course if employers have employees travelling great distances and this all gets too hard, perhaps it’s time to weigh up the option of purchasing a company vehicle for employees’ use which is ideally a work-related vehicle which is then exempt from FBT.
For more information about applying new mileage rules or other options, please contact your usual Deloitte advisor.
August 2018 Tax Alert contents