Motor Vehicle FBT: Proposed New Rules

Proposed Calculation

Taxable value  Category inclusion percentage × vehicle value. The applicable FBT rate is then applied to that taxable value.

The motor vehicle value will continue to be based on either cost price or tax value, but separate valuation percentages are proposed for petrol/diesel, hybrid and electric vehicles. The category percentage measures the permitted level of private use; it is not itself the rate of FBT.

The six categories at a glance

How to choose the category

• The law still requires employers to take reasonable care when classifying vehicles and maintain sufficient records to support the categories selected.
• Start with the vehicle’s expected use, not its type. A ute or van does not automatically receive favourable treatment.
• Decide whether the vehicle is mainly used for business. The commentary indicates that “mainly” would generally suggest more than 50% business use, but the facts and context remain important.
• Ignore qualifying incidental use, then identify exactly what other private use is allowed.
• Check whether permanent exterior branding is required. If the conditions for another category are not met, category 1 is the default.

Important:  Travel between home and work remains private use. Some categories permit that travel, but it does not become business use when testing whether the vehicle is mainly used for business. Emergency vehicles will be exempt from the category approach. The Bill provides for new definition of emergency vehicles which includes ambulances, police cars, fire engines amongst others.

Understanding each category

Category 1 — Full Private Use (mainly private use)

This is the 100% category and the default where the employer does not make a valid selection. It is likely to cover a vehicle provided as part of remuneration, a vehicle with unrestricted private use, or a vehicle used only occasionally in the business. Branding does not change the result if the actual use is mainly private.

Category 2 — Partial private use  (mainly business use)

The 35% category would suit a business vehicle that may be used privately on rostered days off, annual leave or statutory leave, as well as for commuting to work. Private use during working time must otherwise be restricted, apart from incidental travel. Permanent branding would normally be required.

Example  A service company gives a permanently branded ute to a technician. It is needed for customer work throughout the week, but the technician may use it at weekends and drive it between home and work. Provided the written restrictions are followed, category 2 may apply.

Category 3 — qualifying farm vehicles

This 35% category is directed at commercial farming or agricultural businesses where the vehicle is mainly used on farmland by a shareholder-employee of a company or a beneficiary of an employing trust. It recognises that owner-operators may not have conventional rostered days off. Lifestyle blocks and vehicles used mainly privately would not qualify. Branding is not required.

Category 4 —  minor private use (commuting to one workplace)

This 20% category would apply where a branded vehicle is mainly used for business and the only permitted private use is travel between home and the same workplace, apart from incidental use. It recognises that the employee receives a commuting benefit even though broader private use is prohibited.

Category 5 — minor private use (multiple sites or temporary projects)

This 0% category is intended for genuine work vehicles used across multiple sites, or at a project of limited duration. The only permitted private travel is the necessary home-to-work journey, plus incidental use. Permanent branding is required. Tradespeople, mobile service teams and itinerant workers may fit here if the facts and vehicle policy support the restrictions. Previously if the vehicle was principally designed for carriage of passengers it would have been caught  in the FBT rules.

Example: A community nurse travels directly from home to changing patient locations, carries work materials, and has no other private use of the permanently branded vehicle. That pattern is consistent with category 5.

Category 6 — business-only pool vehicles

This 0% category would cover vehicles used exclusively for business, typically kept at the workplace and not allocated to one employee. Limited incidental use would not disqualify the vehicle. An occasional overnight take-home before an early business appointment may also be incidental, depending on frequency and circumstances. Branding is not required.

Watch the distinction: Categories 4 and 5 both restrict private use. Category 4 covers commuting to one regular workplace and carries a 20% percentage. Category 5 requires multiple work sites or a qualifying limited-duration project and carries 0%.

Key concepts and safeguards

Business use and private use

Business use remains travel undertaken wholly and exclusively in deriving the employer’s income. Client visits, deliveries and transporting people, tools or goods between work sites are common examples. Private use includes commuting and other travel that provides the employee with a personal benefit, excluding qualifying incidental travel.

What counts as incidental?

The proposed definition is wider and more practical than the present approach. It would cover travel that is minor and secondary to commuting, or infrequent, short, for a limited purpose and not a substitute for remuneration. The test is fact-dependent: regular personal errands or recurring weekend use are unlikely to be incidental merely because each trip is short.

Likely incidental	Unlikely to be incidental
Stopping briefly for lunch while returning from a client visit	Using the vehicle for weekly household shopping
Taking a pool car home once before an early client appointment	Regularly taking a pool vehicle home for convenience
A one-off, limited personal use approved by the employer	A standing entitlement to use the vehicle for holidays

Branding must be permanent and prominent

Categories 2, 4 and 5 generally require the vehicle to display on its exterior the identification regularly used by the employer or, for a leased or hired vehicle, by the vehicle provider. Removable magnetic signs would not satisfy the proposed permanent-branding test.

• Vehicles bought or leased before the Bill was introduced on 10 September 2026 would not need to meet the new branding requirement.
• A general branding exception would apply to qualifying farming employers that have less than 25 shareholders unless 5 or fewer shareholders hold 50% of the company shares.
• Inland Revenue could approve an exemption where branding is inappropriate because of the sensitive nature of the business, the employee’s role or how the vehicle operates.

When the category changes

The employer currently needs to reassess the vehicle every day. A new category would be required when expected private use changes materially, meaning the change is likely to alter the vehicle’s classification. The revised category would apply from the first day of the quarter after the change. Purchases and disposals would still need to be reflected in the relevant FBT period.

Existing exemptions and scope changes

• The work-related vehicle, emergency call and business travel exemptions would be removed because their outcomes are intended to be dealt with through the categories.
• The on-premises exemption would remain.
• A separate exclusion would apply to specified emergency-service vehicles.
• The weight threshold excluding heavy vehicles from the motor-vehicle FBT rules would increase from 3,500 kg to 6,000 kg.
• Short-term staff use of rental stock by a vehicle-rental business would be treated as an unclassified benefit, based broadly on comparable rental value less any employee payment.
• A close company could elect to use the motor vehicle expenditure rules (i.e. claim % business use) where the only benefits are unclassified benefits and no more than two motor vehicles are provided.

No automatic exemption for utes: The proposal is based on actual and permitted use, not appearance. A double-cab ute available for unrestricted private use is likely to fall into category 1, even if it carries tools or business signage.

Vehicle valuation under the proposal

Proposed from 1 April 2027

Employers could continue to choose between cost price and tax value. New fuel-specific percentages will be updated. Tax-value percentages differ depending on whether an Investment Boost deduction was claimed.

Vehicle type		Cost basis — year	Tax value – year *	Tax value — (investment boost claimed)- year *
Petrol or diesel		20.00% (no change)	36.00 %	41.4% (no change)
Hybrid, including plug-in		19.60%	34.12 %	40.52%
Electric		17.00%	29.76 %	35.00%

• For quarterly rates the annual rates are to be divided by 4. 
• The valuation rates would be reviewed every four years using external running-cost and fuel-price information.

Worked examples

Facts	Value	Category adjustment
Electric vehicle; $60,000 cost; quarterly return; category 4	4.25% × $60,000 = $2,550	20% × $2,550 = $510 taxable value
Petrol vehicle; $50,000 cost; quarterly return; category 2	5% × $50,000 = $2,500	35% × $2,500 = $875 taxable value

The employer would then apply the relevant FBT rate to the taxable value. These examples ignore employee contributions, part-period ownership and other adjustments.

Preparing for the change

• Prepare a complete fleet list showing owner, user, cost, tax value, fuel type, weight and acquisition or lease date.
• For each vehicle, document business use, permitted private use, work sites and whether it is assigned to one employee.
• Update employment agreements and vehicle policies so the private-use restrictions match the intended category.
• Check branding is prominent and permanent. Retain photographs and supplier records as evidence.
• Create a process for employees to report changes in role, work sites or vehicle use before the next quarter.
• Compare cost-price and tax-value methods, including the effect of Investment Boost and the proposed fuel-specific rates.
• Continue applying the current rules until the Bill is enacted and the relevant provisions take effect.

If you would like to discuss how the proposed changes may affect you or your business, please feel free to contact our office.

 

CONTACT US Michael Roberts   michael@reztax.co.nz Martina Evans       martina@reztax.co.nz Shane Zhou            shane@reztax.co.nz Our website:          https://reztax.co.nz/ T: 09-9661370 L1, 10 Manukau Rd, Epsom, Auckland

DisclaimerThis newsletter summarises selected motor vehicle FBT proposals in the Taxation (Annual Rates for 2026–27, FBT Simplification, Foreign Investment Funds, and Remedial Measures) Bill (September 2026). It is for general information purposes only and does not constitute a tax advice. The Bill may change before enactment; the final legislation and Inland Revenue guidance should be checked before implementation. No liability is assumed by the author or the publisher for any losses suffered by any person relying directly or indirectly upon this newsletter.   You are advised to consult a senior representative of the firm before acting upon this information.

September 2026