Income Tax Amendment Act 1986

This commentary item was published in Public Information Bulletin Volume 146, May 1986

More information about Public Information Bulletins.

Motor Vehicle Expense Claims

In April we sent practitioners a note explaining the new requirements relating to motor vehicle expense claims and particularly the record keeping rules. These changes first apply for the 1987 income year. The text of the Commissioner's note is set out below.

The "Tax Practitioner's Handbook for 1986" is not affected by the changes notified in April. The handbook contains on pages 18 and 19 the rules relating to the 1986 year, the last one on the old basis.

TEXT OF COMMISSIONER'S APRIL ADVICE TO AGENTS.

Motor Vehicle Record Keeping Requirements

Introduction

The purpose of this notice is to inform you of the legislation contained in clause 16 of the Income Tax Amendment Bill (No. 5) 1985 which sets out new record keeping requirements for motor vehicles. From 1 April 1986 all self-employed persons and private companies will be required to keep records relating to:

• the business use of any vehicle that is not used wholly for business purposes throughout the year; and
• the total of all travel by the vehicle during the year.
• If these records are not kept, the amount of vehicle expenses and depreciation which may be claimed for tax purposes will be limited to a maximum deduction of 25 percent.

When enacted, the new provisions will first apply for the income year commencing 1 April 1986 (or equivalent accounting year). For this reason details of the practical application are being conveyed to you now to enable you to comply with the new requirements when they come into force. The full text of the proposed legislation is set out in the Appendix to this circular.

What is the effect of this new requirement?

Any future claim for motor vehicle expenditure and depreciation must be made factually on the basis of actual business use of the vehicle as supported by records. Estimations of business/private use adjustments will no longer be acceptable.

Who will be affected?

The legislation will apply in respect of any road vehicle used by:

• A self-employed person (this will include a partnership)
• A private company in which any person is a "major shareholder" as defined. (Refer to the Appendix to this circular.)

Some self-employed taxpayers (e.g. doctors, farmers) have had special rules in the past regarding the apportionment between business and private use of motor vehicles. For and from the income year commencing 1 April 1986 these special rules of apportionment for motor vehicle expenditure and depreciation will no longer apply.

When does it apply?

It applies for and from the income year commencing 1 April 1986, or equivalent accounting year. Taxpayers with early balance dates will not be required to maintain these records in respect of travel undertaken prior to 1 April 1986. In these cases the actual figures for the period from 1 April 1986 should be used as a basis for the apportionment of the expenditure and depreciation for the whole year.

Vehicles for which records need to be kept

Records are required to be kept for each road vehicle of the business that is not used wholly for business purposes. (Use in providing a fringe benefit to an employee will be treated as business use where that private use constitutes a fringe benefit in terms of the fringe benefit tax legislation.) If the vehicle is used 100 percent for business purposes, a separate record of business use is not required.

What records need to be kept?

The clause in the Bill now before Parliament says "... complete and accurate details relating to the distance travelled by any motor vehicle ..." must be kept in respect of:

• the business use of the motor vehicle during the year, where that vehicle is not used wholly for business purposes and
• the total distance travelled by that motor vehicle during the year.

A log book or similar record showing for each business related journey

• The distance travelled.
• A brief description of the purpose of the journey

would meet this requirement.

In addition the odometer reading will be required to be recorded at the beginning and end of the income year to give the total distance travelled by the vehicle in the year.

Where the vehicle is used wholly for business purposes, a separate record of business travel will not be required. However, where there is the possibility of any private use of the motor vehicle, the taxpayer should maintain a separate record.

This record keeping requirement is in addition to the existing requirement to maintain records of expenditure.

What if there is more than one purpose for a journey?

The predominant purpose should be shown.

What will happen if these records are not kept?

If these records are not kept and the vehicle is not used 100 percent for business purposes, the claim for motor vehicle expenditure and depreciation will be limited to 25 percent of the total expenditure and depreciation in respect of that vehicle.

If a vehicle is not used for business purposes at all, no deduction will be permitted.

How will the claim for expenses and depreciation be calculated?

For and from the income year commencing 1 April 1986 (i.e.: 1986/87 income year) any claim for motor vehicle expenditure and depreciation will be required to be made factually on the basis of the actual business use of the vehicle.

For example:

Total business use of vehicle taken from log book						15,000 km
Total use of vehicle				odometer at 1.4.86	25,000 km
				odometer at 31.3.87	45,000 km
						20,000 km
				Total expenditure	$6,000
Allowable deduction:
15,000	X	6,000	= $4,500
20,000		1

The claim for depreciation will also be limited to 3/4 of that calculated on the written down value of the motor vehicle.

What evidence will be required to accompany the return of income?

The record of distance travelled (i.e. the log book or other prime record) will not be required to be sent with the annual tax return. The summarised details from it will be the basis of the claim for deductions. As with other business records it must be kept for a period of ten years and must be available at any time for inspection if requested.

J Simcock

Commissioner of Inland Revenue