Continuing from last month’s discussion on vehicle expense claims for sole traders and partnerships, this article focuses on companies .

Understanding Company Vehicles and Fringe Benefit Tax (FBT)

A company is a distinct legal entity as such, when a company provides a benefit to an employee or shareholder-employee – such as the use of a company-owned vehicle for private purposes – that benefit is typically subject to Fringe Benefit Tax (FBT).

What is FBT?

In simple terms, FBT is a tax applied to non-cash benefits that employees (including shareholder-employees) receive as part of their employment.

The FBT cost is typically the equivalent of getting the value of the benefit as extra salary or wages.

Who is Responsible for Paying FBT?

The obligation to pay FBT lies with the employer not the employee.

Business vs. Personal Use of Company Vehicles

If a company vehicle is used exclusively for business purposes and is not available for private use, FBT does not apply.

However, Inland Revenue takes a strict stance: if a vehicle is available for private use – even if not actively used for personal trips – it is deemed to be a fringe benefit.

Notably, commuting between home and work is classified as personal use with some exemptions.

Work-Related Vehicle Exemption

There is an exemption for certain work-related vehicles, such as utes and vans.

To qualify, the following conditions generally apply:

• The vehicle must be sign-written with the company’s name.
• It should be designed or modified primarily for business tasks (e.g. carrying tools or equipment).
• The vehicle use must be for more than carrying passengers and relate to the business tasks.
• Personal use must be restricted via a formal, written directive to the employee, stating that the vehicle is not to be used privately. Minor deviations in travel for private purposes is allowed.

Opting Out of FBT

Companies that own fewer than two vehicles and do not provide any other fringe benefits may elect to opt out of FBT.

In this case, vehicle use is treated similarly to sole trader arrangements, where expenses (including depreciation and interest) and GST can be claimed based on the actual business use percentage.

Maintaining a logbook for three months is the normal proof of the percentage.

Reimbursing Employees for Personal Vehicle Use

An alternative to providing company vehicles is to reimburse employees (including shareholder-employees) for the use of their private vehicles.

This can be done via:

• Mileage (Km) rates, based on IRD-approved rates, which may offer better tax efficiency, due to the rates been generous.
• Cost-based reimbursements, calculated using actual vehicle expenses proportionate to business use.

Key Considerations for Small Companies

For closely held companies, determining whether a vehicle should be owned by the company or retained privately is an important strategic decision.

To minimise FBT exposure:

• Restrict vehicle use for business-only purposes (though this may not always be practical)
• Use personally owned vehicles and reimburse mileage.

Disclaimer.

This article is intended for general informational purposes only and does not constitute legal, financial, or tax advice.

While care has been taken to ensure the content is current and accurate at the time of publication, tax legislation and Inland Revenue (IRD) guidance may change over time.

Readers are strongly advised to consult with a qualified tax professional or accountant before acting on the information contained herein, especially in cases involving complex or unique business circumstances.

DHCA assumes no liability for any loss or damage arising from reliance on this information.

At David Hooper Chartered Accountants, we help local businesses make smart financial decisions. Get in touch today at [email protected] or call 09 421 1635.