A Week in Review

Kilometre Rate OS Issued

IR has released Operational Statements 19/04a and 19/04b, which confirm the 2018/19 kilometre rates which taxpayers can use to either calculate their own motor vehicle expense deduction claims when they do not wish to prepare calculations based on actual expenditure incurred, or for those who are employers, can be used to calculate employee reimbursements where the employee is using their personal motor vehicle in the course of their employment.

In an attempt to mitigate any confusion, and reflecting the dual purpose the rates can be used for, IR has issued the Operational Statement in two parts:

• OS 19/04a – using a kilometre rate for business running of a motor vehicle — deductions; and,
   
• OS 19/04b – using a kilometre rate for employee reimbursement of a motor vehicle.

Operational Statement 19/04a applies to the 2018/19 income year and sets the following kilometre rates, remembering that the Tier 1 rate applies to the first 14,000km’s of total distance travelled in the vehicle during the income year, while Tier 2 applies for total travel in excess of the Tier 1 threshold:

Vehicle Type	Tier One Rate	Tier Two Rate
Petrol or Diesel	79 cents	30 cents
Petrol or Hybrid	79 cents	19 cents
Electric	79 cents	9 cents

Remember that to use the kilometre rate method, as opposed to the cost method, an election has to be made in the first income year that the vehicle is either purchased or first used for a business purpose (simply using the method in that income years tax return is considered to be an election), and the election is irrevocable, remaining in place until the vehicle is either sold or no longer used for a business purpose. In other words, if you do not elect in the first year to use the kilometre rate method, then the default cost method will apply to that vehicle going forward.

Naturally the calculation of the expense deduction using the kilometre rates, relies on the taxpayer having already determined the business/private use proportions of the particular motor vehicle, usually by way of a logbook maintained for a three month test period, such percentage then able to be used for the following three years (unless the use percentage changes by more than 20%).

Also take note of a common mistake made by taxpayers, that if proper records are not kept to determine the business use percentage of the motor vehicle, then IR can limit a deduction claim to the lesser of 25% or the proportion of actual business use. So it is not simply a case that the claim will be limited to 25% – it could in fact be reduced to 0% if IR considers the motor vehicle has not been used for business use at all.

Finally, effective from 1^st April 2017 for motor vehicles acquired or first used for business purposes on or after this date, close companies can now make an election under section DE 2 to use either the cost or kilometre rate methods as opposed to paying FBT or being exposed to deemed dividends in respect of company motor vehicles which are also used privately by company shareholders. In this regard, the company also makes an irrevocable election by no later than the due date for the filing of the relevant first income tax return (year in which vehicle acquired or first used). It is important to note that if a section DE 2 election is made, then any interest deductions for the motor vehicle are also included in these calculations, and should not be claimed separately in accordance with either sections DB 7 or 8.

A section DE 2 election by a close company can only be made where the only fringe benefit provided by the company, is the use of a motor vehicle by a shareholder employee.  

Operational Statement 19/04b applies to any employee reimbursement made from 16^th August 2019, and uses the same kilometre rates as set out above. Naturally the employee will have to keep similar records to those required under OS 19/04a to determine the business use kilometres of their personal motor vehicle for work-related purposes during the income year, as well as a record of total kilometres travelled by the vehicle for the income year so their employer can establish whether Tier 1 or Tier 2 rates should be used for the purpose of calculating the reimbursement payment.

In absence of any records being maintained by the employee however, the use of Tier 1 rates will be limited to the first 3,500 business kilometres, with Tier 2 rates applying to any additional business use kilometres.

Reimbursement payments calculated and made in accordance with OS 19/04b, will be tax exempt in the hands of the employee.

Confirmation Land Use Payments Taxable

A remedial amendment is to be included in the latest tax Bill presently before Parliament, the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill, to ensure there is no room for uncertainty in the taxpayer’s mind, that any payment received for the grant of a land right (such as a licence) is taxable.

In a media release by the Minister of Revenue on the 23^rd August 2019, the Hon Grant Nash said that such payments were always intended to be taxable in accordance with present legislation, as they are in effect substitutes for rent payments – such payments themselves clearly taxable under section CC 1.

The remedial amendment will apply retrospectively from 1^st April 2013, although with a savings provision to protect tax positions already taken by the taxpayer in respect to tax returns filed or a binding ruling received from Inland Revenue stating that a payment was not taxable, prior to 23^rd August 2019.