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Motor vehicles and fringe benefit tax
Find out when you need to pay fringe benefit tax (FBT) on motor vehicles, how to work out their taxable value and what records you need to keep.
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As an employer, if you make a vehicle available to an employee to use privately you’ll have to pay FBT.
You pay FBT on vehicles made available to:
- employees (and their associated persons), and
Sole traders and partners in a partnership don't pay FBT on business vehicles they use. Instead they make income tax and GST adjustments for private use.
Misconception: You only pay FBT on a motor vehicle if an employee uses it privately
The reality is that as long as a motor vehicle is made available for private use, FBT is payable, whether they actually use it or not.
There are 3 exemptions from FBT for motor vehicles that you may qualify for. There are explained below. For full details see the Fringe benefit tax guide (IR409).
Work-related vehicle exemption
Work-related vehicles are exempt from FBT if they meet all of the following conditions:
- The vehicle must be a motor vehicle, which is defined as:
- a vehicle drawn or propelled by mechanical power, including a trailer, and
- does not include vehicles with a gross laden weight of more than 3,500 kg.
- The principal design of the vehicle isn’t for carrying passengers.
- The exterior of the vehicle permanently and prominently displays regularly used business identification.
- You notify employees in writing that the vehicle is available only for travel between home and work and travel incidental to business (eg passing by the bank on the way home from work).
You should also carry out and record regular checks to ensure the restriction is being followed, such as reviewing logbooks and petrol receipts.
While vehicles with a gross laden weight of more than 3,500 kilograms are not subject to the FBT motor vehicle rules, in certain circumstances where a heavy vehicle has been provided to an employee for private use (eg transport), an unclassified benefit may arise.
If an employee uses the vehicle to attend an emergency call, an exemption from FBT may apply for that whole day. To qualify, the following criteria must be met:
- The employee makes the visit from their home in the course of their employment.
- The purpose of the visit is to provide emergency services relating to the health and safety of any person, or provide essential services.
- The visit takes place between 6pm and 6am.
There are no time restrictions when the visit occurs on a Saturday, Sunday or public holiday or the visit relates to health and safety.
Employees who are required to travel on a regular basis with a vehicle may qualify for the business travel exemption when:
- the employee is absent from home with the vehicle
- the length of the trip is more than 24 hours, and
- use of the vehicle is required for the employee to perform their duties.
A vehicle will also be exempt from FBT when it is unavailable to the employee for at least 24 hours, eg if the vehicle has broken down or is being repaired.
From the 2017-18 income year onwards some close companies can elect to opt out of the FBT rules. To qualify, they must have only 1 or 2 motor vehicles available for private use by their shareholder-employees, and provide no further benefits. If you choose not to use the FBT rules you'll have to:
- apply the rules for vehicle expenditure in your income tax return, and
- make an adjustment for private use under the rules for determining motor vehicle expenditure.
You must make an election by the due date for filing your income tax return covering the year the motor vehicle is:
- acquired, or
- first used for business use.
To make an election you can include a note that the company is opting out of the FBT rules with this income tax return
Once you make an election for a motor vehicle you can't return to using the FBT rules for that vehicle unless the vehicle is disposed of or the close company stops using the vehicle for business use.
Adjustments for private use may also need to be made for GST. Find out more in our GST guide (IR375).
The taxable value of a motor vehicle is based on the cost price, or tax value, of the vehicle and the number of days it is available for private use. Both FBT valuation methods may be calculated on a GST-inclusive or GST-exclusive basis.
If you provide a vehicle to your employee that's available for their private use, you need records that:
- identify the specific motor vehicle
- support the market value or cost price
- show how the liable days are calculated for each quarter, with supporting documentation for any exempt days. If there are no exempt days in a quarter you don't need to keep a record of days
- outline any private use restriction (usually a letter or notice), and
- include working papers showing how the total of any employees' contributions for each quarter was calculated, with supporting documentation.
Work-related vehicles partially available for private use
You need to keep a copy of the written notice explaining a vehicle is partially available for private use.
The written notice must have the actual days the motor vehicle is available, eg Saturdays and Sundays or statutory holidays. These days must be specific. For example, they can't be “any 2 days per week”, as this would mean the vehicle is available on any day, and full FBT would apply.
Vehicles exempt from FBT
You need to keep the following records for any motor vehicle exempt from FBT:
- a description of the vehicle to show that it qualifies for the exemption
- a copy of the written private use letter or notice
You should also conduct and record quarterly checks to ensure the vehicle isn't used for unauthorised private use.
These records provide evidence that a vehicle meets the requirements of a vehicle exemption.
You can use a 3 month test period instead of recording every exemption. To use the test period, keep full records for 3 months then use the results to calculate FBT for a 3 year period. After 3 years you’ll need to run a new test period.
You need to run your test period over a specific time depending on your filing frequency. If you file each:
- quarterly - run your test over a full quarter
- annually - run your test over one full quarter
- income yearly - run your test over any 3 consecutive months in the income year.
Start using the results to calculate your FBT from the first day in the quarter or income year the test is in, or 1 April of the year the test is in for annual filers.
If the actual number of exempt days is 20% higher than the test period result, the application will end on the last day of the quarter, year or income year and you’ll need to run a new test period.