Should I Buy a Ute or Car?

When purchasing a vehicle there are a few factors to consider when deciding between a ute or car for farmers and those in the commercial industries.

Utes

For farmers the biggest tax saving will be gained from buying a ute. The IRD stance is that utes for farmers are 100% deductible as a work vehicle, so you can claim all costs without having to prove business use.

For those in any other industry, the IRD stance is different for utes. There are factors you must meet to claim 100%. If you operate under a company, the ute must be sign written and can only be used for work-related trips to claim 100% of the purchase, running costs and depreciation. If the vehicle is available for private use, this subjects it to the Fringe Benefit Tax (FBT) regime however there are ways around this.

Cars

For farmers, any vehicle that is not a ute is subject to the logbook or FBT methods. This includes vehicles such as a Rav 4 or Jimny, even though these vehicles are used in the same capacity as a ute.

Sole traders, partnerships and trusts must use the logbook method, which requires you to keep a logbook for 3 months of the personal and business use. The percentage of business use is used as the basis for how much you can claim on the purchase, running costs and depreciation.

For example, after 3 months of keeping the logbook your business use is 1,000 km and personal use is 1,000 km, you can only claim 50% of the purchase and associated costs.

Companies can choose between the logbook or FBT methods to determine how much of the costs can be claimed. If using the FBT method, the company claims 100% of the purchase, running costs and depreciation. But if the vehicle is available for private use, the shareholder employee must ‘pay’ for the private use of the vehicle. This is done as a book entry adjustment by your accountant and is calculated as 20% of the GST inclusive purchase price.

If you have a second vehicle, there is a basis for claiming 100% by using the second vehicle for all private travel.

The rules outlined above can be confusing and depends on your circumstances, so if you are considering purchasing a vehicle and want to maximise the tax savings, it is well worth a quick chat with your accountant to come up with the best solution.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.