If you own a company vehicle and are using the Fringe Benefit Tax (FBT) method to calculate the tax on it, there may come a point where it becomes uneconomic to do so. As the cost of the vehicle increases, the amount of income you need to declare under the FBT method may outweigh the benefits of claiming annual expenses. In this blog post, we will explore when it becomes uneconomic to use the FBT method for motor vehicles owned by companies in New Zealand.
First, let's take a quick look at how the FBT method works. Under this method, you declare income of 20% of the cost of the vehicle, and then claim expenses (typically between a few thousand per year), depending on the vehicle's engine size, age, issues etc (Sounds like your favourite accountant). You can then work out the benefits by comparing the two. For example a $10,000 vehicle incuring $5,000 worth of expenses each year:
Income $10,000 * 20%
= $2,000 in “FBT Income”
Expenses $5,000
Net $3,000 (benefit)
For vehicles that cost less than say $30,000, the FBT method can be an efficient way to calculate the tax on your company vehicle. However, as the cost of the vehicle increases, the income declared under the FBT method also increases. This means that the FBT payable on the vehicle may become greater than the tax benefits of being able to claim annual expenses.
Another factor to consider is depreciation. In New Zealand, Inland Revenue allows you to claim depreciation of up to 30% of the cost of the vehicle each year. However, in reality, the actual price depreciation of a vehicle is typically around 10% per year. This means that you may only be claiming something you will have to repay in depreciation recovery income later when you sell the vehicle.
So, when does it become uneconomic to use the FBT method for motor vehicles owned by companies in New Zealand? It really depends on the cost of the vehicle and the level of expenses you can claim each year. As a general rule of thumb, if the FBT payable on the vehicle exceeds the tax benefits of being able to claim expenses, it may be time to consider an alternative method.
One alternative method is to use the kilometre rate method, where you claim a set amount per kilometre driven for business purposes. This method can be more tax-efficient for higher-cost vehicles, as the amount you can claim is not linked to the cost of the vehicle.
Another method may involve completing a logbook and applying that % to your expenses. You could also look at whether you should purchase a work-related vehicle where any personal use is mainly incidental.
Please book an appointment directly into my calendar to discuss your options.
In conclusion, the FBT method can be a tax-efficient way to calculate the tax on your company vehicle, but it may become uneconomic as the cost of the vehicle increases. When deciding which method to use, it's essential to consider the cost of the vehicle, the level of expenses you can claim, and the FBT payable. If the FBT payable exceeds the tax benefits of claiming expenses, it may be time to consider an alternative method, such as the kilometre rate method. It's always best to seek professional advice to ensure you're making the right decision for your business.