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employment

Vehicle allowances and mileage reimbursement

Key Takeaway

In New Zealand, vehicle allowances and mileage reimbursements are governed by employment agreements and tax law. Allowances are fixed payments, potentially taxable, while reimbursements cover actual work expenses and can be tax-exempt if meeting specific Inland Revenue Department (IRD) criteria and rates. Employers and employees must agree on these terms in good faith.

Vehicle Allowances and Mileage Reimbursement in New Zealand Employment Law

This article outlines the legal framework surrounding vehicle allowances and mileage reimbursement for employees using their own vehicles for work purposes in New Zealand. It distinguishes between allowances and reimbursements and covers their treatment under employment and tax legislation.

Defining Vehicle Allowances and Mileage Reimbursements

It is important to differentiate between a vehicle allowance and a mileage reimbursement:

  • Vehicle Allowance: This is a fixed payment made by an employer to an employee, often on a regular basis (e.g., weekly or monthly), to contribute towards the costs of using a personal vehicle for work. This payment may be made irrespective of the exact mileage travelled and is generally intended to cover anticipated expenses like fuel, maintenance, depreciation, and insurance [Source: Income Tax Act 2007, s CB 3].
  • Mileage Reimbursement: This is a payment made by an employer to an employee to cover the actual costs incurred by the employee when using their personal vehicle for specific work-related travel. Reimbursements are typically based on the distance travelled (mileage) and are often calculated using a per-kilometre rate. Employees usually need to provide records of their travel [Source: Income Tax Act 2007, s CW 10].

Legal Basis in Employment Agreements

The terms and conditions regarding vehicle allowances or mileage reimbursements must be included in the employee's individual employment agreement [Source: Employment Relations Act 2000, s 63]. Both the employer and employee have a duty to deal with each other in good faith when negotiating, entering into, and maintaining an employment agreement, which includes discussions about these payments [Source: Employment Relations Act 2000, s 4].

There is no legal requirement for employers to offer vehicle allowances or to reimburse mileage at a specific rate (such as the Inland Revenue Department (IRD) rates). However, if an employer requires an employee to use their personal vehicle for work, the associated costs are a legitimate matter for negotiation and agreement within the employment relationship.

Tax Implications

The tax treatment of vehicle allowances and mileage reimbursements differs significantly:

  • Taxable Allowances: Generally, a fixed vehicle allowance paid to an employee is considered part of their gross income and is subject to PAYE (Pay As You Earn) income tax deductions [Source: Income Tax Act 2007, s CB 3]. This is because it is often seen as a payment 'for' employment, rather than a direct reimbursement of specific work-related expenses.

  • Exempt Reimbursements: Payments made by an employer to an employee for the use of the employee's vehicle for business purposes can be exempt from income tax, provided certain conditions are met. This exemption applies when the payment is for the employee using their own vehicle in the course of their employment and does not exceed an amount determined by the Commissioner of Inland Revenue [Source: Income Tax Act 2007, s CW 10]. The Inland Revenue Department (IRD) publishes mileage rates annually that are used to determine the tax-exempt portion of such payments. If an employer pays an employee more than the IRD's published mileage rate, the excess amount may be treated as taxable income [Source: Income Tax Act 2007, s CW 10].

  • Reimbursement of Actual Expenditure: A payment made by an employer that reimburses an employee for actual expenditure incurred on account of the employer is generally exempt from income tax, provided the expenditure is not of a private or domestic nature [Source: Income Tax Act 2007, s CW 17]. This typically requires the employee to provide evidence (e.g., receipts, logbooks) of the expenditure incurred for work purposes.

Employer Obligations

Employers have obligations regarding vehicle allowances and mileage reimbursements, including:

  • Good Faith: Employers must act in good faith when negotiating and administering employment agreements, including terms related to vehicle use [Source: Employment Relations Act 2000, s 4].
  • Clear Terms: Ensure that the employment agreement clearly specifies any vehicle allowance or mileage reimbursement arrangements, including the rates, conditions for payment, and record-keeping requirements [Source: Employment Relations Act 2000, s 63].
  • Record-Keeping: Maintain accurate records of all payments made to employees, including allowances and reimbursements, for tax and employment law compliance purposes [Source: Tax Administration Act 1994, s 22].

Employee Rights

Employees have the right to:

  • Negotiate Terms: Discuss and negotiate the terms of any vehicle allowance or mileage reimbursement with their employer as part of the employment agreement [Source: Employment Relations Act 2000, s 63].
  • Clarity: Expect clear and unambiguous terms regarding vehicle use payments in their employment agreement [Source: Employment Relations Act 2000, s 63].

When to Seek Independent Legal Advice

Individuals seeking to understand their specific rights and obligations, negotiate employment agreement terms related to vehicle use, or resolve disputes regarding allowances or reimbursements, should consult with an employment law professional or contact their local Community Law Centres for free legal advice.

Key Resources