By Amy Sexton & Andrea Scatchard

Every year the Commissioner of the Inland Revenue sets the motor vehicle kilometre expense rates for businesses. This year you may have missed the publication of the 2024 income year rates as it was published amid the Minister of Finance delivering the Budget on 30 May 2024.

For the 2024 income year, both the Tier One and Tier Two rates have increased from 2023, reflecting an overall increase in vehicle running costs largely due to fuel costs, insurance, and interest rates: 

What does Tier One and Tier Two mean?

The Tier One rates reflect the fixed and variable costs of running a vehicle and can be used for the first 3,500km of business travel, or the business portion of the first 14,000km of total travel in the vehicle. After these limits, the lower Tier Two rates apply (which only reflect variable costs). How to decide on which rate to use is summarised in the flow chart below:

What do I need to remember?

The Commissioner of Inland Revenue is required to regularly set kilometre rates so that these can be used by self-employed business owners or close companies to determine available tax deductions for business use of a vehicle (if they choose to use that method). In practice, the same rates are often also used by businesses that reimburse employees for the use of personal vehicles for work purposes. Provided reimbursements are made at or below the specified rates, they can be paid “tax-free” without the employer doing further analysis.

Use of these rates is not compulsory. Business owners can instead claim deductions for actual costs incurred, and likewise, employers can reimburse employees at higher rates, but records would need to be kept substantiating that the rate of reimbursement is a reasonable approximation of actual costs.

Self-employed and close companies

If you are a sole trader or qualifying close company and use the kilometre rate method to claim business vehicle costs, this new rate applies for the 2024 year, that is, 1 April 2023 - 31 March 2024 (if you have a standard balance date).

The increase in the rate will increase the amount of vehicle costs you can claim when you file your 2024 tax return. If you have already filed your 2024 income tax return relying on the 2023 kilometre rates, you may be able to self-correct the difference in your 2025 income return, depending on the amount of the difference between the two amounts claimed. If the difference between what was originally claimed, and what can now be claimed is material, you can file a Notice of Proposed Adjustment (this is only available within four months after the filing of an income tax return).

Employers

If you are an employer and are reimbursing employees for work-related travel, the increased rates apply to reimbursements made from the date that the new rates were issued – 30 May 2024. If your reimbursement policy states that you will reimburse employees at the Inland Revenue rate, you will need to update the rate you pay as soon as practically possible. When rates are increased, a lag in updating rates paid to employees, while potentially disadvantageous to employees, does not cause a PAYE problem.

The increase in the Tier Two rates as between 2023 and 2024 may have some scratching their heads, as rates have only increased by 1c across the board, whereas electric vehicles (EVs) are now subject to road user charges of 7.6c per kilometre. This is because the predominant purpose of these rules is to be backward looking for use by the self-employed and close companies. We anticipate the Tier Two rate for EVs will increase next year.

If your reimbursement policy states a set rate at which you will reimburse work-related mileage, and this is lower than the new rate, you do not need to do anything as the amount you pay will be tax-free, but you may get pressure from employees to increase the reimbursement rate.

For more information about applying the new kilometre rates or mileage reimbursement options please contact your usual Deloitte advisor.