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December/January 2020

by David Feehan

Accounting Down: 2020 IRD Revisions To Claiming Tax On Your Vehicle

by David Feehan

Accounting Down: 2020 IRD Revisions To Claiming Tax On Your Vehicle

2020 IRD Revisions: The Inland Revenue Department promised to make the claiming of motor vehicle usage much easier and so they came up with a range of solutions, all worse than the next and making it more complex than it’s ever been. Still, that is the way of the IRD. It’s really simple but doesn’t work, or it’s really complicated and, still doesn’t work…

First a look at how it has been

There were three options basically. The first was if you had kept a logbook and all your receipts, then you could claim the self-employed percentage of the logbook (which needed to be kept for three months every two years) and apply that percentage to your total costs.

The second option was the same, BUT restricted to 25% of the total costs if you had not kept a logbook. And the third option was a no-questions-asked maximum of 5,000km at the going IRD rate for that particular year.

That third option was good for those too lazy to keep a logbook, or too lazy to keep receipts – or too lazy to do either! However, it did not favour musicians living and working in country areas, where they might have to travel long distances to play, thus very quickly using up the maximum of 5,000km per annum. It also did not favour those living in the Auckland region with long distances between gigs.

How is it calculated now?

The options that can be used now are complicated by the fact that you do need to select which method you are going to use.

Once you have bought your vehicle, you need to decide whether you are going to claim all your expenses and use the logbook to determine what percentage you are going to use; OR you can use the upgraded 5,000km method (which I will describe below). The difference to note is that once you have selected your method, you must keep that method for the duration of your ownership of that vehicle.

Let’s take the first method, the one involving keeping a logbook.

You can still purchase logbooks at most stationers, and the logbook is kept in the same way as before with the percentage achieved for self-employment being applied across all relevant expenses, and also applied to depreciation of the vehicle (which is still at 30% per annum).

This assumes that you are keeping all receipts for any maintenance on your vehicle (including petrol) and registration, insurance, WOFs etc. A reminder again that you MUST keep this method going for the duration of the ownership of the vehicle. If you forget to keep the logbook, the percentage immediately drops to 25% of the receipts you’ve kept – so it’s up to you to treat your music as a business.

The second method comes with some options.

The first option is to decide, after buying your vehicle, that you are not going to keep a logbook and not going to keep receipts – which is really bad business practice, but hey when you just wanna play music, it often happens. So, this method has been set by the IRD at a maximum claim of 14,000km per annum at the going rate per km, which for this year is 79 cents. This is also for the duration of the ownership of the vehicle. However, there are some fishhooks here which bring you back to needing to keep a logbook.

Firstly the 14,000km can only be claimed IF you have kept a logbook proving that you did in fact travel the distance you are claiming. So, back to the logbook again. The IRD however, have advised that they are prepared to accept GPS km figures or figures collected from diaries as evidence of the kms you have travelled. This is good for musicians who are regularly playing, practising, doing promo work etc., because these things are normally diarised and repetitive, and do quickly add up.

You don’t need to have kept receipts under this regime. However, the first hook is that once you get passed 14,000km, the rate per km you can claim drops to 25 cents per km for every km after 14,000 kms. The second hook is that if you haven’t kept any logbook, diary, or the equivalent of a GPS system, then 14,000 at 79 cents per km maximum (the old 5,000km maximum) drops to 25% of that distance, or 3,500km at the going rate per km.

So how does this change affect musicians?

My experience as a tax agent is that many of my clients were using the old 5,000km maximum at the going rate per km. So, if you used that method, your claim would be $3,950 per annum, which is not too bad. Considering that most musicians can’t afford an expensive vehicle anyway it generally proved to be a more convenient claim, and with less work than keeping logbooks, depreciation schedules and receipts.

However, now if you operated under the same methods, the claim drops to 14,000km x 25% (3,500km) which at the going rate gives a claim of $2,765 per year – significantly less. A lot of musicians are suddenly finding where they used to get a decent refund, that refund has lessened considerably – and for some has turned into a tax debt.

Obviously, it is your business, and you are in charge of your own destiny. You can just accept the lower expense claim and a lower refund/tax to pay, or you can put a bit more work into it and utilise things like Google maps, GPS systems (and the various logbook Apps available), diaries or the dreaded logbook to ensure that you will have a greater claim. After all, if you are keeping a record of your total kms for the year, you no longer have a cut off at 5,000km but can go right up to 14,000km without question (as long as you have proof) before the rate drops. And frankly, 14,000km at 79 cents per km gives you a claim of $11,060 per annum, which is nothing to laugh about. Of course, if you are claiming this amount, your income needs to reflect it.

Just remember, once you are set on the regime you are using, you must stay with it for the duration of that vehicle. So it’s actual costs + logbook or IRD kms rates + a logbook (or x 25% per km without a logbook).

The new system is more complex and if you don’t put the work in the claim will not be as good as it used to be, however, the possibilities of claiming significant km rates and getting good refunds in one of the largest expense areas for a musician if you do a little bit of work and keep a good diary, is huge. Happy travelling!

David Feehan is a musician and the MD of Tapestry Music Ltd, specialising in tax consultancy and small business advice in Wellington.