Back on the road: fringe benefit tax changes coming for motor vehicles

After more than 40 years of calculating fringe benefit tax (FBT) on motor vehicles the same way, in Budget 2026 it was confirmed that changes are coming from 1 April 2027 to simplify the rules and to make the outcomes fairer.

The finer details of the new rules are not yet known, but this article summarises what we know so far.

The objective of reform is to refocus the FBT rules away from taxing the mere availability of a vehicle for private use and to instead better quantify the actual private benefit being provided based on how the vehicle is used. Rather than needing to constantly require logbooks to be completed a vehicle will be categorised when a vehicle is provided to an employee, with the level of FBT payable only altering if there is a material change in the level of private use. The existing exemptions for work-related vehicles, business trips and emergency calls will be repealed.

Currently the ability to fall within the work-related vehicle exemption is restricted based on the physical characteristics of the vehicle (i.e. it can’t be predominantly designed for carrying passengers), going forward a “normal car” may also qualify for lower rates of FBT if it is used for business purposes.

At present the quarterly taxable value of a motor vehicle benefit is based on the cost (or tax book value) of a vehicle, multiplied by the number of days in the quarter the vehicle was available for private use (i.e. after determining exempt days):

[GST-inclusive cost or Tax Book Value] x [Quarterly percentage] x [Private use days / 90]

The new approach will simplify the equation by taking away the need to count days in the quarter or monitor exempt days:

[GST-inclusive cost or Tax Book Value] x [Quarterly percentage] x [Inclusion rate]

The “inclusion rate” is a new percentage which represents the extent to which there is a benefit being provided which should be subject to FBT.

Categorisation approach

The motor vehicle categories are as set out in the table below, supplied by Inland Revenue.

When considering which category is most relevant for a vehicle there will be some features which will be more determinative of the outcome; for example:

• Branding: to qualify for categories 2, 3 or 4 the vehicle must be branded.
• Main purpose: if the main purpose of a vehicle is to provide a private benefit, then the vehicle will fall into category 1.
• Business use: all categories other than 1 require the vehicle to have a business use purpose. We expect this should be a purpose other than getting the employee to or from work; that is, the vehicle is used for some business purpose during the workday.
• Restrictions: categories 2, 2b, 3 and 4 all require some level of restrictions on the level of private use by the allocated driver.
• Shared vehicles: categories 3, 4 and 4b all indicate a possible level of ‘shared use’ of the vehicle. A category 3 vehicle may be driven to the office by the same employee each day but could be made available for other employees to also use for business purposes.
  

In all cases, incidental private use of a vehicle should not impact on the vehicle classification. Incidental use is likely to be something that is incidental or ad hoc, and we would expect it would include examples which would be considered incidental use under the existing work-related vehicle definition (for example stopping at the supermarket on the way home if it is not a major deviation from the direct route). The intention is to ensure that very minor use that is not intended to have a remunerative effect does not create FBT liabilities.

Other changes

The “quarterly percentage” referred to above was last changed in 2009. The purpose of this percentage is to approximate the vehicle running costs, factoring in things such as depreciation, maintenance, insurance and fuel costs. Inland Revenue has reassessed vehicle running costs and propose to amend these percentages. These calculations were prepared prior to the current fuel crisis (and we don’t expect them to be increased upwards). The new rates include a 12.5% discount to reflect that at times a vehicle may be unavailable due to mechanical issues etc.

A major difference is that there will be variable rates based on the vehicle fuel type. This means that a lower percentage will apply to hybrid and electric vehicles.

Where to from here

It’s expected that legislation to implement these changes will be tabled in Parliament prior to the election. The rules should follow a normal select committee and submission process (albeit disrupted by the election period). The rules are intended to apply from 1 April 2027, so there will be a very short window between the law being enacted and taking effect. It’s therefore prudent that employers start considering the potential impact on their vehicle fleets now.

For more information, please contact your usual Deloitte adviser.