If you use your vehicle solely for business purposes, you could claim the full running costs as a business expense at tax time. But if you use your vehicle for both business and personal reasons, you can claim only a portion of the total costs.

These calculations can be tricky if you’re not sure what to look for, so we’ve put together a step-by-step guide to help.

How to keep a vehicle logbook

Claiming business vehicle expenses starts with keeping a logbook. According to the Inland Revenue Department (IRD), your logbook should record:

• The start date and the vehicle’s odometer reading on that date.
• The date, distance and reason for each business journey across a 90-day period.
• The end date of the 90-day period and the vehicle’s odometer reading on that date.
• Any other information the IRD might need to process your claim.

You can use the IRD’s template, or find a vehicle logbook or mileage app with the functionality you need. Digital records can make life easier at tax time.

Use the logbook to calculate the total distance your vehicle has travelled and the distance driven for business purposes, and then use those numbers to calculate the percentage of work-related travel:

(Distance travelled for business / Total distance travelled) x 100 = Percentage of vehicle use for business

For example, if you travelled 500 km over the 90 days, and 150km of that was for business, your percentage of vehicle use for business purposes will be:

150 km / 500 km x 100 = 30%

Logbooks remain valid for three years, as long as the vehicle’s business use doesn’t change by more than 20 per cent in that time.

It’s important to keep a logbook so you can accurately calculate and justify to the IRD the work-related percentage of vehicle use. Not keeping a logbook may limit your ability to claim.

Once your logbook is sorted, there are two different methods small business owners can use to calculate tax deductions: the kilometre rate method and the actual costs method.

(If you run a small company with shareholder employees, more complicated rules and decisions regarding fringe benefit tax may apply. In those circumstances, it’s best to seek professional tax advice.)

The kilometre rate method

With the kilometre rate method, you use per-km rates and your logbook to calculate the total claim for your vehicle’s business use.

There are two rates:

• The tier-one rate covers a vehicle’s fixed and running costs. This applies to the business portion of the first 14,000 km of a vehicle’s travel across the financial year.
• The tier-two rate covers running costs for business travel beyond the first 14,000 km.

The IRD publishes kilometre rates after the tax year ends, usually by May. The below rates apply to the most recent income year, 2021-2022.

To calculate your deduction, work out the deduction for each tier using the following formulas, then add both values:

(Total km x Your vehicle’s tier-one rate) x Work-related portion = Tier-one deduction

(Total km x Your vehicle’s tier-two rate) x Work-related portion = Tier-two deduction

For example, if your diesel vehicle travelled 30,000 km across the financial year, and your logbook showed 60 per cent was for business use, then:

Tier one: 14,000 km x $0.83 x 60% = $6,972

Tier two: 16,000 km x $0.31 x 60% = $2,976

Total deduction = $6,972 + $2,976 = $9,948

You do not need to consider GST and the rates include vehicle depreciation, so don’t claim a separate depreciation deduction for the vehicle.

The actual costs method

The actual costs method requires you to keep track of the total costs of running your vehicle, so you can claim the work-related percentage of those costs.

That means keeping accurate records and proof of all vehicle-related expenses during the year, not just for the 90-day logbook period. This includes all petrol, oil, repairs, maintenance, insurance, registration, tolls and parking.

With the purchase of a new vehicle, you can also claim the work-related proportion of the GST on the purchase price.

You have two options to calculate the work-related portion with this method:

• Use a logbook to calculate the percentage of the vehicle’s travel that is work-related.
• Claim up to 25 per cent of all vehicle expenses – just as though you would if 25 per cent of the car’s kms were work-related. You could still be asked by the IRD to justify the percentage claimed.

Select which option you will use to identify the work-related portion, then apply the following calculation:

Actual costs x Work-related portion OR 25% = Claimable cost

For example, if over the course of the financial year you have spent $25,000 in actual costs on a vehicle, and your logbook shows that 70 per cent of the vehicle’s use is work-related, then you can calculate your claimable cost as:

$25,000 x 70% = $17,500

If you also bought the vehicle in the same financial year and paid GST on the purchase price, you could also claim a GST deduction using the following formula:

GST amount x Work-related portion = GST deduction

If the GST paid was $5,000 and the work-related portion was 70 per cent, the deduction would be calculated as:

$5,000 x 70% = $3,500

If you are unsure about any calculations or would like more information on business-related vehicle expenses, contact your professional tax adviser to discuss your unique business situation.

Making calculations for work-related car expenses requires diligence, an accurate logbook and clear expense records – but with that information in place, tax time might get that little bit simpler.

This article was originally published in February 2020 and again in February 2022. In light of upcoming tax time, we’ve refreshed the article to provide further insight to small business owners.