Commissioner's statement of a mileage rate for expenditure incurred for the business use of a motor vehicle

This statement may be cited as "Operational Statement 09/01: Commissioner's statement of a mileage rate for expenditure incurred for the business use of a motor vehicle".

Introduction

All legislative references are to the Income Tax Act 2007.

Under section DE 3 a self-employed person may use one of three methods to calculate the proportion of business use of a motor vehicle, namely:

• actual records
• a logbook, or
• a mileage rate.

Section DE 12(3) requires that the Commissioner sets a mileage rate that taxpayers may use to calculate the expenditure or loss on a motor vehicle that represents the proportion of business use of a motor vehicle. This statement sets a mileage rate as required by section DE 12(3).

Application

Self-employed

The mileage rate applies in respect of:

• self-employed taxpayers
• up to a maximum of 5,000 kilometres of work-related travel each year
• motor vehicles irrespective of engine size whether they are powered by petrol or diesel.

The mileage rate applies from the 2008-2009 income year.

The mileage rate does not apply in respect of motor cycles.

Employee reimbursement

The mileage rate may be used as a reasonable estimate by employers reimbursing employees for:

• business use of an employee's vehicle, and
• shareholder employees.

Mileage rate

Under section DE 12(3) the mileage rate set by this statement for motor vehicles is 70 cents per kilometre.

Rob Wells
LTS Manager, Technical Standards

Background (not part of the Operational Statement)

Section DE 12(3) requires that the Commissioner must from time to time set and publish a mileage rate. The above rate is based on information obtained from a survey of the running costs of petrol and diesel vehicles across a range of engine sizes.

It includes the cost of repairs and maintenance, purchase prices and the cost of fuel ($1.58 and $0.98 per litre for 91 octane petrol and diesel respectively) and is based on 14,000 kilometres of travel per year.

It is noted that the price of fuel is only one component that is considered in the setting of the above mileage rate. Calculations show that fluctuations in the price of fuel have only a small influence on the overall mileage rate. Therefore, it will not be necessary to review this mileage rate each time there is a change in the price of fuel. However, Inland Revenue will continue to monitor fuel prices and issue a revised mileage rate where appropriate. Such a review will also be done at least once a year.

Based on this information, the Commissioner has arrived at a weighted average figure that applies in respect of both petrol and diesel motor vehicles.

Alternative methods for the self-employed

Section DE 3 provides three methods for calculating the business use, namely actual records (section DE 5), a logbook (sections DE 6 to DE 11) and a mileage rate (section DE 12). Therefore those in self-employment may also use either of the following two methods, ie they may calculate their actual business-related expenditure or use the logbook method. If their business-related travel is over 5,000 kilometres then they must use one of these methods.

Actual expenditure (section DE 5)

Instead of using the above mileage rate a self-employed person may claim deductions for the actual expenditure they incur and an amount of depreciation loss for the business use of their motor vehicle. If you do this then you must make sure that you keep accurate records to determine the proportion of business use. Those records will need to show the reasons for and the distance of journeys by a motor vehicle for business purposes.

Logbook method (sections DE 6 to DE 11)

Alternatively, to establish the proportion of business use of a motor vehicle, a person may keep a logbook for a test period of at least 90 consecutive days. 

The log book test period is used to establish the average proportion of travel by the vehicle for business purposes during the logbook term. Taxpayers may then apply that proportion for the logbook term (up to three years) to calculate the deduction for the expenditure that they incur and the amount of depreciation loss for the business use of the motor vehicle.

The logbook must record:

• the start and end of the 90 day test period; and
• the vehicle's odometer readings at the start and end of the test period; and
• the distance of each business journey; and
• the date of each business journey; and
• the reason for each business journey; and
• any other detail that the Commissioner may require.

Employee reimbursement

Section CW 17(2) provides an exemption for an amount that an employer pays to an employee as reimbursement of expenditure incurred by the employee in connection with the employee's employment or service. Employers may reimburse the employee based on the actual expenditure incurred by that employee. Alternatively, section CW 17(3) provides that an employer may make a reasonable estimate of the amount of expenditure likely to be incurred by an employee or group of employees.

The Commissioner accepts that employers may regard the mileage rate set out above when reimbursing employees under section CW 17(2) as being a reasonable estimate under section CW 17(3).

Shareholder-employees

Where shareholder-employees meet the employee criteria, they may be reimbursed using the mileage rate as a reasonable estimate.

Supplementary questions and answers to Operational Statement
OS: 09/01 Commissioner’s statement of a mileage rate for expenditure incurred for the business use of a motor vehicle

Question 1: The OS states that the Commissioner’s mileage rate applies from the 2008-2009 income year. Does this mean that the mileage rate applies from 1 April 2008 even though the statement was not issued until May 2009?

Reply: Yes; for taxpayers with a standard balance date of 31 March OS 09/01 applies from 1 April 2008. Section DE 3 of the Income Tax Act 2007 (“the Act”) allows taxpayers to calculate the proportion of business use of a motor vehicle using actual records, a log book or using a mileage rate. Section DE 12(3) requires the Commissioner to set a mileage rate. OS 09/01 was published when many self employed taxpayers were in the process of having returns of income prepared for the year ended 31 March 2009.

Question 2: The OS sets a mileage rate of 70 cents per kilometre. However, previous mileage rates set by Inland Revenue included both a banded rate (62 cents per km for 0 – 3,000km, then 19 cent/km for each km over 3,000km) as well as a flat rate of 28 cents/km. OS 09/01 sets one mileage rate of 70 cents per km. We have been asked what rate self –employed taxpayers should use where their business mileage exceeds 5,000km for the income year. Also no mention has been made of what is happening with motor cycle reimbursing rates or special individual rates. Can you please advise what is happening to the other rates, and how all those other rates will apply? Further, have the individual special rates changed?

Reply: Previous mileage rates sets by Inland Revenue were issued as a compliance cost reduction initiative, but there was no underlying statutory authority for setting those rates, nor were taxpayers compelled to use those rates. Section DE 12(3) now requires the Commissioner to set and publish a mileage rate. However section DE 12(1) provides that a mileage rate can only apply where a person’s business travel is 5,000km or less in an income year. Therefore, the Commissioner’s mileage rate can only be used by self-employed taxpayers whose annual business travel is 5,000km or less. Self-employed taxpayers whose annual business travel exceeds 5,000km will need to use actual costs. OS 09/01 replaces any previous published statement by the Commissioner on motor vehicle mileage rates, and as a consequence the other rates cease to apply from the 2009 income year onwards.

No mileage rate has been set for motorcycles as this mode of transport is not commonly used for business purposes. Any self employed persons who use a motor cycle for business purposes will need to calculate their actual expenditure or in the situation of an employer reimbursement, they may make a reasonable estimate of the employee’s costs.

Individual special rates were in effect employer estimates using a formula developed by Inland Revenue. Employers may continue to use their reasonable estimate, and do not require Inland Revenue’s approval.

Question 3: Does the 5,000km limitation for self-employed taxpayers apply to employer reimbursements? Will this also apply to shareholder-employee reimbursements?

Reply: Section CW 17 provides that an employer may reimburse an employee for expenditure incurred by that employee on the employer’s behalf and that reimbursement is exempt income to the extent to which it is a reimbursement. Section CW 17(3) allows the employer to make a reasonable estimate of the expenditure likely to be incurred by the employee (or group of employees). Having set the mileage rate in OS 09/01, the Commissioner accepts that employers may use this as being a reasonable estimate of motor vehicle running costs when reimbursing employees for the business use of an employee's motor vehicle. The 5,000km limit provided in section DE 12(1) does not extend to employers using the mileage rate to reimburse employees. Although this will mean that employers may use the mileage rate to reimburse employees where the employee’s business travel exceeds 5,000km, it should also be borne in mind that section CW 17(3) does require a reasonable estimate of the expenditure likely to be incurred by the employee and that the exemption provided in section CW 17(2) only applies “to the extent to which it reimburses the employee for expenditure for which the employee would be allowed a deduction if the employment limitation did not exist

Shareholder-employees may also use the mileage rate for reimbursements related to business use of a motor vehicle. Similarly, the 5,000km limit does not apply to reimbursements to shareholder-employees but we reiterate that any reimbursement should based on a reasonable estimate of expenditure.

Question 4: When will the Commissioner review the mileage rate again, to reflect fuel price fluctuations?

Reply: Inland Revenue will not be amending the rate for every change in the price of fuel. We have been advised, and research confirms, that the price of fuel has only a marginal effect on the overall cost of owning, maintaining and running a motor vehicle. It takes a considerable movement in the price of fuel to change the mileage rate by even 1 cent. We want to avoid any increase to compliance costs by setting different tax rates for one income year that could cause confusion for taxpayers and increase resource costs for Inland Revenue. Inland Revenue will monitor fuel prices and publish a rate at least once a year.

Taxpayers are not obliged to use the Commissioner’s mileage rate. They can still use actual costs if they consider that the Commissioner’s mileage rate does not reflect their true costs.