MOTOR VEHICLE FBT CHANGES

Motor vehicle FBT changes you say?

Why Are the Rules Changing?

The current FBT regime focuses on whether a vehicle is available for private use. Even if private use is minimal, FBT can still arise if the vehicle is made available to an employee. Businesses often need to track exempt days, maintain detailed records, and monitor restrictions on private use throughout the year.

The Government has acknowledged that the rules have become complicated and can produce inconsistent outcomes. Under the new framework, Inland Revenue intends to focus on the level of private benefit being provided rather than simply whether a vehicle happens to be available for private use on a particular day.

According to the Budget 2026 announcements, the objectives are to:

• Simplify administration.
• Reduce the need to count exempt days.
• Better align FBT with actual private benefit.
• Create a more consistent framework across different vehicle types.

When Will the Changes Apply?

The proposed timeline for the upcoming motor vehicle FBT changes is:

• Draft legislation expected during August–September 2026.
• Consultation and submission process.
• Legislation to be enacted before 31 March 2027.
• New rules effective from 1 April 2027.

Therefore, businesses with vehicle fleets should start reviewing their arrangements well before the commencement date.

The Big Shift: From Availability to Vehicle Categories

Currently, motor vehicle FBT is generally triggered when a vehicle is available for private use. The extent of actual private use is often secondary to the vehicle’s availability. Under the new regime, vehicles will instead be classified into categories that reflect their primary use. This means the central question will become:

How is the vehicle mainly used?

Of course (haha) the challenge is that Inland Revenue has not yet released detailed guidance on exactly what “mainly” means. Many commentators expect it will mean more than 50% business use, but this has not yet been confirmed. The consequence is that some businesses may end up relying more heavily on logbooks than they do now, despite the stated simplification objectives.

The New FBT Formula

The proposed formula becomes:

Cost or Tax Book Value × FBT Rate × Category Percentage

Instead of adjusting for exempt days, the calculation will use an inclusion rate based on the vehicle category. The inclusion percentage is effectively Inland Revenue’s estimate of the amount of private benefit provided. This change removes the need to calculate exempt days throughout the year for many vehicles.

New Vehicle Valuation Rates

The Budget announcements also introduce revised annual and quarterly valuation percentages. The rates differ depending on whether the vehicle is petrol or diesel, hybrid, or fully electric. Indicative quarterly rates include:

Cost Price Method

• Petrol/Diesel: 5.7%
• Hybrid: 4.9%
• Electric Vehicle: 4.25%

Tax Book Value Method

• Petrol/Diesel: 11.81%
• Hybrid: 10.13%
• Electric Vehicle: 8.75%

The lower rates for hybrids and EVs reflect their generally lower operating costs.

Understanding the New Categories

The proposed rules introduce five primary categories plus a special farming category. The categories are:

1. Full private use – 100%
2. Partial private use – 35%
3. Limited private use farm vehicles – 35%
4. Minor private use – 20%
5. Multi-worksite vehicles – 0%
6. Pool vehicles – 0%

Category 1 – Full Private Use (100%)

Category 1 applies where the vehicle is mainly used for private purposes. These are the traditional company vehicles provided as employee perks and often form part of remuneration packages. Private use is broadly unrestricted.

Example 1 – Company Car

A company supplies a manager with a vehicle that can be used freely:

• Personal shopping
• School runs
• Holidays
• Weekend trips

The vehicle is primarily a personal benefit. Under the new regime, the vehicle will generally fall into Category 1 and attract a 100% inclusion rate. For some businesses this may produce a worse result than the current rules, particularly where they previously relied on exempt-day calculations.

Example 2 – LTC Owning Investment Property

The LTC purchases a vehicle.  It is occasionally used to visit the rental property but is used mostly for personal things, such as the list above.

The vehicle is primarily a personal benefit. Under the new regime, the vehicle will generally fall into Category 1 and attract a 100% inclusion rate. This is why we usually don’t recommend that an LTC with rental property purchase a vehicle.

Category 2 – Partial Private Use (35%)

This category is likely to be one of the most important for many businesses. The vehicle must:

• Be mainly used for business.
• Be branded.
• Allow regular commuting.
• Allow private use during rostered days off, leave periods, public holidays or similar non-working days.

Example 1 – Consulting Business

A consulting firm provides a sign-written vehicle that staff use to visit clients every day.

The vehicle:

• Goes home with the employee.
• Is used extensively for business.
• May be used privately during weekends and holidays.

Under current rules, FBT may be close to 100%. Under Category 2, only 35% of the vehicle value is subject to FBT.

Example 2 – Tradie Vehicle

A sign-written hatchback is driven between jobs during the day and taken home at night. Although not a ute and not previously qualifying as a work-related vehicle, it may qualify for Category 2 if it is mainly used for business. This could significantly reduce FBT compared with current outcomes. For many businesses this category will represent a genuine tax saving.

The Biggest Loser: Work-Related Vehicles

The headline change is the repeal of the traditional work-related vehicle exemption. Historically, many businesses have relied on the exemption for:

• Double-cab utes.
• Vans.
• Other qualifying work-related vehicles.

Where private use was restricted, FBT could often be reduced to nil. Those rules are effectively disappearing.

Example

A sign-written double-cab ute used by a building company:

Current rules:

• Home-to-work travel only.
• Restricted private use.
• Often 0% FBT.

New rules:

• Could fall into Category 3 (20%).
• Could potentially fall into Category 1 if requirements are not met.

Result: many current zero-FBT arrangements will face increased costs. This is why many tax advisers describe ute owners as the major losers under the reforms.

Category 2B – Farm Vehicles (35%)

This category specifically addresses farming businesses.

The vehicle must:

• Be mainly used for farming activities.
• Be owned by a closely-held farming company.
• Be used by a shareholder-employee.
• Support farming operations.

Unlike Category 2, branding is not required.

Example

A dairy farming company owns a utility vehicle used throughout the farm. If the vehicle is mainly used for farming operations, it may qualify for Category 2B with a 35% inclusion rate. For many farming businesses this will be a favourable outcome compared with current non-WRV situations.

Category 3 – Minor Private Use (20%)

Category 3 is designed for vehicles that are primarily business vehicles but allow limited private use.

Requirements include:

• Vehicle mainly used for business.
• Branded vehicle.
• Main private use is commuting.
• No private use on non-working days.

Example

An electrician drives a sign-written van:

• Home to work.
• Work to customer sites.
• No private weekend use.

The vehicle may qualify for Category 3. Only 20% of the vehicle value is subject to FBT.  For businesses currently paying substantial FBT on non-WRV vehicles, this category could produce a significant saving.

Category 4 – Multi-Worksite Vehicles (0%)

Category 4 is potentially the most favourable category.

It applies when:

• The vehicle is used for business.
• The employee travels across multiple worksites.
• Private use is limited to commuting associated with those work patterns.
• Branding requirements are met.

Example 1 – Plumber

A plumber leaves home each morning and travels directly to various client sites. The vehicle is genuinely required for multiple worksites. The inclusion rate may be 0%.

Example 2 – Service Technician

A technician attends five different customer locations daily. Under current rules the employer may have FBT exposure. Under Category 4 there may be no FBT liability at all. This category could become one of the most important planning opportunities under the new rules.

Category 4B – Pool Vehicles (0%)

Pool vehicles continue to receive favourable treatment.

Vehicles can qualify where they:

• Are exclusively business vehicles.
• Are available to multiple employees.
• Are not assigned permanently to one person.
• Have no meaningful private use.

Example

A business maintains three vehicles at its premises. Any staff member can use them during work hours, but nobody regularly takes them home. The vehicles may qualify for a 0% inclusion rate. However, the rules appear stricter than current arrangements, with very limited scope for occasional take-home use.

Will Logbooks Become More Important?

While the reforms aim to simplify compliance, an important question remains:

How will Inland Revenue determine whether a vehicle is mainly used for business?

The discussion material currently provides limited guidance.

We expect:

• Logbooks will remain important.
• Businesses may need evidence supporting their chosen category.
• Vehicle usage reviews will become part of annual tax processes.

The compliance burden may therefore shift rather than disappear entirely.

What Businesses Should Be Doing Now

Although implementation is still some time away, businesses should start reviewing vehicle arrangements. Key actions include:

Review Fleet Usage

Check Branding

Several categories require branding. A branded vehicle may qualify for significantly lower inclusion rates than an unbranded vehicle.

Identify Work-Related Vehicle Exposure

Businesses heavily reliant on current work-related vehicle exemptions should calculate likely future costs now.

Consider Vehicle Allocation Policies

Pool vehicles and multi-worksite vehicles may become more attractive from an FBT perspective.

Monitor Legislative Developments

Final Thoughts

The motor vehicle FBT reforms will deliver the biggest change to New Zealand’s vehicle taxation rules in more than 40 years. Inland Revenue will replace technical availability tests and exempt-day calculations with a category-based framework that focuses on how businesses and employees actually use vehicles.

As always, contact us for help.