SHOULD I GET THE COMPANY TO BUY ME A CAR?

Should I get the company to buy me a car? It depends, first, on whether your company is a Look-Through Company (LTC) or a standard company. If it’s an LTC, there may be little or no Fringe Benefit Tax (FBT) to pay. See Can My LTC Buy Me a Company Car? Will I Have to Pay FBT? for that scenario specifically. For a standard company, FBT needs proper consideration, and that’s what this guide works through.

30-Second Read

• Own the vehicle personally and use it for business, and you claim a portion of costs — via a logbook-based percentage or IRD’s kilometre rates — rather than the whole cost.
• The company owns the vehicle, and FBT generally applies for any private use, unless a specific exemption applies.
• FBT on a company vehicle uses one of two methods. Cost price: 5% of GST-inclusive cost per quarter, 20% annually. Tax book value: 9% of GST-inclusive depreciated value per quarter, 36% annually, with an $8,333 floor.
• The standard FBT single rate is 63.93%. That’s different from the older 49.25% rate some calculators and older guides still quote — 49.25% is now the alternate rate for lower-income employees, not the default.
• There’s no one right method. Running the numbers both ways, for your specific vehicle and usage, is the only way to know which costs less.

We work through both ways to use a vehicle, the FBT mechanics, a worked example, and what to do next.

 

Two Ways to Use a Vehicle in Your Business

1. Business Use of a Private Vehicle

This means you own the vehicle personally, and use it partly for business. You can claim a portion of the running costs as a business expense. The exact percentage depends on your actual business use, established either by keeping a logbook(opens in new tab) over a representative period, or using IRD’s standard kilometre rates(opens in new tab). There are specific rules and record-keeping requirements either way. It’s worth getting the mechanics right before you rely on a claim.

2. Company-Owned Vehicle

Here, the company owns the vehicle, and FBT generally applies to any private use. Some situations are exempt — a vehicle genuinely restricted to work use, for instance. For most small business owners with a company car available for private use, though, some FBT liability is the norm, unless a personal contribution is made instead to cover the private-use cost.

Fringe Benefit Tax (FBT)

What is it? FBT is tax paid on a non-cash benefit you receive from your company — something that isn’t wages, but still has real value to you. The law requires tax on that value.

How is it paid? You elect an FBT filing basis with IRD — generally quarterly or annually — and pay according to that schedule.

Is it compulsory? It depends on your circumstances. There’s no single answer that fits every business. This is worth discussing with your accountant rather than assuming either way.

How FBT on a Vehicle Is Calculated

There are two methods for working out the taxable value of a company vehicle available for private use:

• Cost price method: 5% of the vehicle’s GST-inclusive cost price per quarter (20% annually). This stays fixed regardless of how much the vehicle has depreciated.
• Tax book value method: 9% of the vehicle’s GST-inclusive depreciated value per quarter (36% annually), with a floor — the tax book value used can’t fall below $8,333 (GST-inclusive).

Either taxable value then gets multiplied by the applicable FBT rate. The standard single rate is 63.93% — this is the rate most small businesses use by default. A lower alternate rate of 49.25% is available for benefits attributed to employees on lower total remuneration. It comes with more detailed record-keeping and quarterly reconciliation requirements, though.

Worked Example

Say your company owns a vehicle purchased for $50,000 (GST-inclusive), available to you for private use for a full quarter, with no personal contribution made.

Cost price method:

• Quarterly taxable value: 5% × $50,000 = $2,500
• Annual taxable value: 20% × $50,000 = $10,000
• Annual FBT at the single rate: $10,000 × 63.93% = $6,393

Tax book value method, assuming the vehicle has since depreciated to a tax book value of $20,000:

• Quarterly taxable value: 9% × $20,000 = $1,800
• Annual taxable value: 36% × $20,000 = $7,200
• Annual FBT at the single rate: $7,200 × 63.93% = $4,603 (rounded)

In this example, the tax book value method costs less overall, since the vehicle has depreciated well below its original cost. Cost price stays fixed no matter how old the vehicle gets. Which method wins can flip over the years you own the car — often favouring cost price early on, and tax book value later, once the $8,333 floor hasn’t yet been reached.

If the vehicle isn’t available for the full quarter, the taxable value is pro-rated. Multiply by the number of days actually available, divided by 90.

What Should I Do?

Run the numbers both ways for your specific vehicle. Use your actual figures rather than assuming one method is always better. The right answer depends on the vehicle’s cost, its age, how it depreciates, and how long you intend to keep it. Talk to us about which method suits your situation before you commit to one.

Further Reading

• Can My LTC Buy Me a Company Car? Will I Have to Pay FBT?
• Motor Vehicle FBT Changes