Reimbursing shareholder-employees for motor vehicle expenses and the use of the Commissioner's mileage rate
QB 10/01 considers reimbursing of shareholder-employees for motor vehicle expenses using the mileage rate, and clarifies the 'employee criteria'.
All legislative references are to the Income Tax Act 2007, unless otherwise stated.
We have been asked whether an employer who reimburses an employee for the business use of their private motor vehicle is able to use the Commissioner's mileage rate as set out in Operational Statement 09/01: Commissioner's statement of a mileage rate for expenditure incurred for the business use of a motor vehicle ("OS 09/01"), published in Tax Information Bulletin Vol 21, No 3 (May 2009), and to also clarify the "employee criteria" when it comes to reimbursing shareholder-employees.
We have also been asked whether the 5,000 km limitation on using that mileage rate also applies in these circumstances.
An employee may receive reimbursements that are exempt from tax for the use of their private motor vehicle under section CW 17. For the purposes of section CW 17, the meaning of "employee" includes a shareholder-employee of a close company who does not receive PAYE income payments.
The options that an employer has to reimburse an employee, including a shareholder-employee, for the business use of their private vehicle are:
- actual expenditure incurred by the employee for the distance travelled by the vehicle for work purposes;
- an employer's own reasonable estimate of expenditure likely to be incurred by the employee. This estimate may be based on a rate published by a reputable independent New Zealand source, eg, the New Zealand Automobile Association Inc.; and
- the mileage rate set by the Commissioner pursuant to section DE 12. Although the 5,000 km limitation does not apply in these circumstances, an employee whose annual business travel exceeds 5,000 km may need to be reimbursed using an alternative method.
Section CW 17 provides that an employee may be reimbursed an amount that is exempt from tax for the use of their own vehicle for work related purposes.
Employers can reimburse an employee based on actual expenditure incurred by the employee for the distance travelled by the employee's own vehicle for work purposes, or by making a reasonable estimate of the amount of expenditure likely to be incurred under section CW 17(3).
As a reasonable estimate employers may reimburse their employees using the rates published by a reputable independent New Zealand source, such as the New Zealand Automobile Association Inc., provided that the rate represents a reasonable estimate of the expenditure likely to be incurred by the employee. Employers may also use the Commissioner's mileage rate as set out in OS 09/01 as a reasonable estimate to reimburse employees.
The employee criteria
In regards to reimbursing shareholder-employees, OS 09/01 states that "where shareholder-employees meet the employee criteria, they may be reimbursed using the mileage rate as a reasonable estimate".
In fact, where a shareholder-employee meets the employee criteria as defined in section YA 1, they are entitled to tax-free reimbursements in the same way as an ordinary employee.
Section YA 1 defines the term "employee" as a person who receives a PAYE income payment and includes a person to whom sections RD 3(2) to (4) apply for the purposes of section CW 17.
A person comes within section RD 3(2) if they are a shareholder-employee of a close company and they do not receive salary or wages of a regular amount for regular pay periods of one month or less, or where the payments received by the person as an employee total to less than 66% of that person's annual gross income.
"Close company" is defined in section YA 1 and for the purposes of sections RD 3(2) to (4), it includes a company with 25 or fewer shareholders.
Sections RD 3(3) and (4) provide that the shareholder-employee referred to in section RD 3(2) may choose that the amount paid to them in the current tax year is not PAYE income payment, and that the amounts paid to them in later tax years are deemed not to be PAYE income payments.
Consequently, shareholder-employees, whether or not they receive a PAYE income payment, may come within the meaning of employee for the purposes of receiving tax free reimbursements.
The 5,000 km limitation
The Commissioner's mileage rate in OS 09/01 was set taking into account the purchase price of a motor vehicle and other expenses such as insurance and registration, as well as running costs (including the cost of fuel, and repairs and maintenance etc). This rate is based on average travel for a motor vehicle of 14,000 km a year, and is primarily intended to be used by self-employed taxpayers whose business travel is 5,000 km or less each year.
While the 5,000 km limitation does not apply to reimbursing employees, it is up to the individual employer who chooses to use the Commissioner's mileage rate to ensure that the rate is suitable and that it represents a reasonable estimate of the employee's expenditure. If an employee's annual business travel exceeds 5,000 km, the Commissioner's mileage rate may no longer represent a reasonable estimate of that employee's expenditure as those costs which are not running costs will have been recovered. In these circumstances the employer may need to use an alternative method to reimburse the employee for the excess kilometres.