By far and away the largest category of fringe benefits provided in Australia are cars. In the 2016 year, the Australian Taxation Office indicated that the total taxable value of all cars provided to employees in the year was $1.3 billion. This makes car benefits a significant contributor to tax revenue in Australia. But just because you have provided your employee with a motor vehicle does not automatically guarantee that there is fringe benefits tax (FBT) to pay.
So let’s go through an overview of when your business might be liable for FBT on the vehicles they provide.
First and foremost, there must be a car. The FBT definition of a car is: “a motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than one tonne and fewer than nine passengers”. So, it explicitly does not include motor cycles, buses, utes which can carry more than one tonne, trucks etc.
Next, the car must be held by the business (that is, either owned or leased) and be available for private use by an employee or an associate of the employee.
This means if the car is garaged at business premises and is only used to travel to work sites and not allowed to be used for private travel, no FBT will be payable. Any travel between work and home is usually considered private. There are a couple of limited exceptions.
Once you have established that a car fringe benefit has been provided, there are a couple of ways to value the benefit that has been provided.
The simplest method is the Statutory Formula Method. This calculated by multiplying the base value of the car by the statutory rate of 20%. The base value is equal to the purchase price of the car including GST and any accessories fitted. Once the car has been held for a full four FBT years, the base value can be reduced by one third for all subsequent years. The taxable value can be reduced if the car is not available for private use for part of the year.
The alternative method is the Operating Cost Method. Under this method, the employee must maintain a log book to establish the private percentage. The employer must accumulate all operating costs (eg fuel, repairs, registration, insurance, leasing charges etc) and calculate depreciation and interest charges according to some deemed cost rules to establish the total operating cost. The value of the fringe benefit is the total operating cost multiplied by the private percentage established in the log book. The log book must be maintained in accordance with specific rules. Clearly, it’s a far more complicated method, but where a car is used mostly for business purposes, will result in a lower FBT liability.
An employer can choose which method they use and the method of calculation can change each year. So, it’s perfectly acceptable to calculate your FBT liability under both methods and choose the one that results in a lower liability.
There are a couple of other ways that an employer can reduce their FBT liability on cars:
- An employee can make an after tax contribution to the cost of running the car.
- Limiting the availability of the car for private use. For example, if an employee goes on leave and the car is left at the office and not available to the employee, FBT liability is reduced. However, there are strict requirements for the documentation which must be kept if a car is not available for private use.
So what about Utes with a carrying capacity of more than one tonne? Although these vehicles are not considered a car, they are not exempt from FBT. They are however classified as “residual” fringe benefits and therefore FBT may still apply. However they will be exempt if private use is limited to travel between home and work and any other private use is minor, infrequent and irregular. The ATO have developed strict guidelines around what that actually means, so before you rush out and get yourself a brand new shiny ute, I suggest you check out the relevant practical compliance guideline.
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