Payroll Bulletin 15

Written By Natasha Ghag

KILOMETER RATES FOR THE BUSINESS USE OF VEHICLES FOR THE 2025 INCOME YEAR

This year, the IRD expanded the number of rates from four to eight.

The Inland Revenue has conducted a review of the published vehicle kilometer rates, due to a significant difference in vehicle running costs between the different vehicle types (Petrol, Diesel, Petrol Hybrid and Electric). Different rates have been set for four vehicle categories.

What does Tier One and Tier Two mean?

The Tier One rates can be used for 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).

What do I need to remember?

The Commissioner sets kilometer rates for self-employed business owners or close companies to determine available tax deductions for business use of a vehicle (if they choose to use the kilometer rate method).

Use of these rates is not compulsory. Business owners can instead claim deductions for actual costs incurred (the cost method), 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 estimate of expenditure”.

Self-employed and close companies

The new rates apply for the 2025 year, that is, 1 April 2024 - 31 March 2025 (if you have a standard balance date).

If you have already filed your 2025 income tax return relying on the year 2024-kilometre rates, you may be able to self-correct the difference in your 2026 income return.

Employers

The new rates apply to reimbursements made from the date that the rates were issued – 30 May 2025. 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.

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.

New guidance provided

Along with the new rates, the guidance OS 19 04 (KM 2025) includes a new section to provide additional guidance on the use of the kilometre rates.

The standard rule remains, that the Tier One rates can be used for the business portion of the first 14,000km of travel, technically requiring logbooks to be kept establishing that business portion of travel. Operational statements 19/04a and 19/04b both allowed, in the absence of a logbook, for the Tier One rate to be used for the first 3,500 km of business travel. This new guidance and its examples make no mention of this 3,500km threshold, but does refer to 19/04a and 19/04b as providing more detailed information.

Use of motor vehicle for both business and private (non-taxable) purposes

Businesses that use a motor vehicle for both business and private purposes must calculate the proportion of business use, whether using actual motor vehicle costs (cost method) or the kilometer rates.

Source of information

If you have any questions or need further information, please don't hesitate to contact Olga at olga@topflight.co.nz



Natasha Ghag
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Payroll Bulletin 14