Tax Considerations for Purchasing a Vehicle for your Business

One common question we receive from clients is: “Should I purchase a car under my name or the company’s name for maximum tax benefit?” Let’s dive into the advantages and disadvantages of buying a car under your company’s name.

Advantages of Buying a Car Under the Company’s Name

1. GST Refund
   Your company can claim back 15% GST on the car’s purchase price.
   • Example: For a car valued at NZD 100,000, the company can claim a GST refund of $13,043.48 (calculated as 100,000 ÷ 23 × 3).
2. Depreciation Benefits
   Depreciation is a tax deductible expense, which helps reduce taxable income.
   • Using the straight-line method (21% depreciation rate for cars): A car worth NZD 100,000 allows for a fixed annual depreciation of $21,000.
   • Using the diminishing value method (30% depreciation rate):
     • Year 1: $30,000 (100,000 × 0.3)
     • Year 2: $21,000 ((100,000 – 30,000) × 0.3)
     • Year 3: $14,700 ((100,000 – 30,000 – 21,000) × 0.3), and so on until the value approaches zero.
3. Deductible Running Costs
   All car-related expenses, such as registration, fuel, maintenance, repairs, and insurance, can be claimed as company costs to offset taxable income.

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Disadvantages of Buying a Car Under the Company’s Name

1. Asset Liquidation Risk
   In the event of company bankruptcy, the vehicle becomes part of the company’s assets and is subject to liquidation.
2. GST on Sale
   When selling the car, the company must return 15% GST on the sale price to the IRD. Additionally, if the sale price exceeds the car’s book value, the excess depreciation claimed previously must be added back as taxable income (depreciation recovery).
   • Example: A car initially worth NZD 100,000, after three years of depreciation, has a book value of NZD 34,300. If sold for NZD 50,000:
     • Depreciation recovery: $15,700 (50,000 – 34,300), which is taxable.
     • If sold for NZD 20,000, the loss on disposal: $14,300 (34,300 – 20,000), can be deducted.
3. Fringe Benefit Tax (FBT) on Private Use
   If a company car is used for private purposes (including by shareholders or directors), it triggers FBT, which is taxed at a high rate (up to 63.93%). The taxable fringe benefit is based on the value of the car and the extent of private use. To avoid FBT, the company must demonstrate that the car is exclusively for work-related purposes, such as:
   • Parking the vehicle at the company premises after work hours.
   • Restricting usage to business-related activities.
   For exemption from FBT, the vehicle must:
   • be a motor vehicle, which is defined as a vehicle drawn or propelled by mechanical power (including a trailer)
   • have permanent company branding must be prominently displayed
   • have a gross laden weight of 3,500 kg or less
   • be mainly designed to carry goods or goods and passengers equally
   • give employees a letter of restriction stating that the work related vehicle is not available for private use except for travel between home and work, and for travel related to the business
   • complete 3-monthly checks to makes sure employees are using the vehicles only for work-related purposes.

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Summary: Advice from Us

If your vehicle is of high value and will be used privately, it’s often safest to keep the car under your personal name. You can then claim a portion of the running costs corresponding to its business use.

Every business situation is unique, and your decisions will impact the company’s financial performance. Having a knowledgeable and professional accountant who understands your needs is crucial to ensuring compliance while maximizing your tax benefits.

We hope this article has been helpful. If you have any questions, feel free to contact us!