2025 IRD Kilometre Rates: What NZ Small Businesses Need to Know

Tier One rates relates to the first 14,000 the vehicle travels in total for the year, then the Tier Two rates come into play. 

Use of the rates for business vehicles

In situations where a business intends to claim expenses for a motor vehicle that is used for both business and non-taxable (private) purposes, they must calculate the proportion of business use. They can do this by either deducting the business portion of their actual motor vehicle costs (the cost method) or using the kilometre rates set annually by the Commissioner (the kilometre rate method).

The above rates are applicable when using the kilometre rate method for calculating business use of the vehicle during the 2024-2025 income year and provide a reasonable estimate of the related expenditure for the use of the vehicle that can be claimed as a deduction in that year.

Use of the rates for employee reimbursement for use of a vehicle

The Commissioner’s motor vehicle kilometre rates are set primarily to provide an alternative method for calculation of claims for vehicle expenditure by business customers. They relate to the prior income year to assist with calculating deductible expenditure for return filing for that year. However, the Commissioner understands that some employers may use the motor vehicle kilometre rates as a reasonable estimate of expenditure likely to be incurred by employees when providing reimbursements for the business use of private motor vehicles.

The requirement that reimbursement must be a “reasonable estimate of expenditure” does not necessarily mean the kilometre rates can or should be used. There are other methods of determining reasonable expenditure of an employee’s business use of a vehicle. However, the use of the kilometre rates for determining a “reasonable estimate of expenditure” is accepted by the Commissioner, but employers need to be aware of factors that may mean this is no longer reasonable.

The kilometre rates are set for a particular year based on factors that impact expenditure in that period. Reimbursement of expenditure is likely to occur in the current income year where factors may suggest these rates are no longer a reasonable estimate of the expenditure incurred. Further, the use of these rates may not be practical based on an employer not knowing each vehicle type employees are using. In these circumstances the Commissioner accepts a reasonable estimate that may be a blended average of the published kilometre rates, in order to reduce any compliance costs. However, employers need to consider that this is still appropriate in the circumstances and timing of any reimbursement payment.

Operational Statement OS 19 04b clarifies the Commissioners statement for an acceptable method to establish a tax exempt employee reimbursement. 

Source: IR Tax Technical  OS 19 04 (km 25)