IRD’s changes to FBT (Fringe Benefit Tax) which took effect on the 1st of April 2006 removed the tax benefit of “Nine to Five” leases, where an employee (most commonly a shareholder-employee) would own a vehicle and lease it back to the company for the period of business use only. This arrangement is now treated the same as company-owned vehicles and therefore is liable for FBT.

For vehicles which are leased rather than owned by an employee it is possible for a company to reimburse the employee on an Income Tax and FBT free basis for work related use of the vehicle. Reimbursement can only be for actual expenditure incurred and can only cover revenue cost items; capital costs cannot be reimbursed.

In the case of a vehicle leased under an operating lease (as defined for income tax purposes), the monthly lease payment paid by the employee to the lease company is a recurrent and therefore a revenue cost; as such it is possible to reimburse the employee for the following expenses:

• Fuel and oil
• Repairs and maintenance
• Insurance and registration
• Lease payments under a “Tax Operating Lease”

The IRD specifically allows employers to make a reasonable estimate of actual work related expenses and reimburse employees on this basis and it is commonly accepted that a fair and reasonable basis would be to maintain a log book for a period of three months to determine the average percentage of business use. The reimbursing allowance based on this percentage may only reimburse actual revenue costs and there can be no margin added to the reimbursement.

The end result of this approach is that, in relation to leased vehicles, the business use percentage of all expenses becomes tax deductible to the employer (an expense incurred in carrying on its business); the reimbursement is tax free to the employee. A key point to note is that leasing charges are comprised of a number of factors, notably depreciation and capital cost.

For vehicles owned by employees other than those under a “Tax Operating Lease’ the reimbursement described above will not be as tax effective because they are only able to receive a reimbursement of actual operating expenses (ie fuel, repairs & maintenance and insurance) incurred during business use but not any capital costs or depreciation.