Buying a car and minimising your tax

Hamish Mexted Reducing Tax

We get asked all the time about the best way to buy a new work-come-personal vehicle for a business owner. In short, there’s no “one size fits all” answer.

Assuming you’ve got a company setup (i.e. you’re not a sole-trader), there are two options. Either buy the car in the business, or buy the car in your personal name.

If bought in your personal name:

If you’re going to buy it in your personal name, you can either:

  • Keep a log book all year long and claim mileage from the company at the IRD’s per-determined rates. I can hear you groaning already…nobody wants to keep a log book all year long.
  • Keep a log book for three months (much better than for a whole year!) and then put the business portion through the business. You can put all of the vehicle’s running costs through, including depreciation, petrol, maintenance and any interest paid to purchase the car.

If bought in the business name:

If you’re going to buy it in the business, you can either:

  • Pay what’s called Fringe Benefit Tax (FBT) and claim 100% of the running costs of the car, regardless of whether or not you were using the car for business or personal use. Driving to Auckland for a holiday? If you’re paying FBT you can claim it. The amount of FBT you pay is based on (1) the value of the car and (2) how much you earn.
  • Reimburse the business each year for 20% of the cost price of the vehicle. In this situation you’re also entitled to claim 100% of the running cost of the vehicle.

So what does all of this mean for me?

The best option for you will depend on:

  1. What the car you’re buying is worth
  2. What your annual running costs will be
  3. What your business use of the car is going to be

The lower the business use, the more likely it is you’re better off to pay FBT. Alternatively if it’s a super expensive car you’re probably better off to buy it in your personal name.

An example

Let’s say you’re looking at buying a car worth $32,000 including GST, and you’re earning $90,000 per annum. You’ll be using the vehicle 60% of the time for business use. In this case you’re better off to buy it in your personal name.

However, if the 60% business use was actually 20%, you’re better off to buy the car in the business and pay FBT.

Next steps…

The best option in your circumstance will depend on what the car’s worth, what you earn, and how much you’ll use the car for business. Get in touch with us and we’ll work with you to find the best course of action for you.