Consultation Proceeds on Use of Kilometre Rates for Vehicles
IR has released two draft operational statements on the use of the Commissioner’s kilometre rates (IRD mileage rates for those of you that have the same grey matter as I do!) for calculating business deductions and employee reimbursements with respect to the business use of a motor vehicle.
The first is ED00214a, in essence a discussion between the alternative options of using either the kilometre rate or the cost method to compute the business deductions for the use of a motor vehicle. My view of the main takeaway points:
- From income years commencing 1st April 2017, unless you elect to use the kilometre rate method for a vehicle in the income year it is first used, the cost method is the default rate and it will then apply until that vehicle is sold. Elections are on a per vehicle basis and are irrevocable.
- The kilometre rates have two tiers, presently 79c in respect of the first 14,000km total travel by the vehicle during the income year, and then a tier two rate which is dependent on the type of vehicle, ranging between 9c and 30c. Note there is no longer a 5,000km cap.
- A 90 day logbook can be used to establish the business use proportion for either calculation method for the subsequent three year period, the odometer reading then simply required to be recorded at the end of each income year for the kilometre rate method, so you can determine the total travel by each vehicle and consequently the application of the tier one/two rates.
- Use of the kilometre rate method results in no depreciation deduction/recovery income for a motor vehicle and in the case of a close company, no separate interest claim under either section DB 7 or 8 in respect of any finance costs associated with the vehicle.
- A close company (5 or fewer natural person/trustee shareholders holding >50% of voting/market value interests) can elect to use these calculation methods instead of paying FBT, provided the only non-cash benefit the company provides is the private use of a motor vehicle to shareholders.
- Failure to maintain the requisite logbook (or actual records) can result in vehicle deduction claims being limited to 25% or lesser – I find that often people think it is an automatic 25% claim which is not correct.
The second operational statement is ED000214b, which deals with the issue of employee reimbursements, and where the employer chooses to use the kilometre rate method as a reasonable estimate of the expenditure likely to be incurred by the employee in using their private motor vehicle for employment purposes. IR decided to issue two operational statements on the kilometre rate method, to minimise the risk of confusion between business deduction claims and employee reimbursements. Main takeaway points:
- While employers can base reimbursement payments on actual expenditure incurred by the employee, they are entitled to use an alternative method provided the amount calculated is a reasonable estimate of the expenditure likely to be incurred by the employee. Using the kilometre rate method is acceptable for the purposes of the “reasonable estimate” criteria.
- The same two tier system applies, although the tier one rate reduces to 76c for the first 14,000km, and the tier two rates range between 9c and 26c. Again no 5,000km cap, a logbook and then an annual odometer recording simply required to determine firstly the business use proportion and secondly the application of the relevant tier rate.
- No logbook (alternative acceptable evidence) results in tier one reducing to 3,500km (25% of 14,000). Again note that 25% is a maximum claim, not a minimal entitlement.
- Reimbursements made in accordance with these rules are exempt income to the employee. While these rules are to take affect from 2018 income years and onwards, considering we are already now in the 2020 year, it is expected the new rates will only apply from the date of the operational statement.
Deadline for comment on both exposure drafts is 28th June 2019.
With the theme of Budget 2019 being a focus on wellbeing measures, it is not surprising that there was no main course offered on the Day itself, post the early entrée pre-Budget announcements of changes to the GST rules on telecommunication services and the repeal of the racing totaliser duty (aka the betting duty).
In essence the GST changes are likely to see you now being charged GST on your roaming services when you travel overseas, with non-residents not being so charged when travelling in NZ.
Budget 2019 did make a mention however of the proposed digital services tax, timetabled for introduction in 2020, although with no detail other than the signalling of a discussion document to be issued shortly which will explore options for taxing the digital economy, one potential template being hinted as a 2-3% tax on turnover.
Some would also argue no doubt, that the new international visitor levy of $35 to be implemented and charged to most international visitors entering NZ from 1st July, is effectively a tax, albeit not imposed on our own citizens.
Post the release of Budget 2019, we have also seen the introduction to Parliament of a myriad of Budget related Bills, including social assistance legislation to give effect to income support policy changes announced (indexing benefits to average wage increases) and legislation to introduce a school donations scheme for decile 1-7 schools, where participating schools (those agreeing not to request donations from parents – hmmmm??) will receive $150 per student per year from the Government, reducing the financial pressure on parents to ensure their children’s basic needs are met, by feeling compelled to have to make annual donations to the school.
"Amazon Tax" GST Bill reported back
The so called “Amazon Tax” legislation has been reported back to Parliament by the FEC.
A key element of the Bill is the introduction of GST on low value imported goods (now defined as <$1,000), although the FEC has now recommended an implementation date of 1st December 2019, as opposed to the original 1st October 2019. Additional recommended changes have seen:
- a transitional rule added for contracts entered into pre the legislation application date but where payments will be received by the supplier post 1st December 2019 (say an annual magazine subscription), to not be subject to the new rules for the first 396 days of the agreement;
- the ability for offshore suppliers who primarily sell goods to consumers to also charge GST on B2B supplies and to issue a single document that satisfies both the tax invoice and GST receipt requirements thereby enabling NZ businesses to recover the GST charged; and,
- reducing the 95% threshold as introduced, which enabled offshore suppliers to collect GST on goods valued >$1000 (as opposed to NZ Customs collecting it), to a scenario of 75% of the total value of their sales to NZ are items valued at less than $1,000.
Arguably of equal concern to our own investors and with the potential to further numb the Auckland property market, are the new ring-fencing rules with respect to residential rental property deductions. Unfortunately however, there is no such deferral recommendation by the FEC to the present April 1st 2019 commencement date, although there are some amendments to the rules as introduced, the primary one being a widening of the range of income to which ring-fenced deductions could be applied, to include depreciation recovery income (usually related to historic depreciation claims now), rental income from revenue account property outside the scope of the existing rules, and taxable income from property that arises in the year there is a change of use of the property – residential to commercial for example.
We now await the second reading.