FBT and cars: It’s that time of year again

Right now, many accountants will be working on preparing 2011 fringe benefits tax returns for their business clients. As cars are the most common fringe benefit, I thought I would touch on a few issues as a reminder to SMEs of what to look out for.

During April 2011, the ATO is writing to selected employers about exempt vehicles and car fringe benefits. The ATO said it plans to remind employers who are not registered for FBT and have registered a business vehicle as exempt (eg. a dual cab, a single cab ute, four-wheel-drives and vans) of the limited private use eligibility criteria for exempt vehicles.

Generally, an employee’s use of a taxi (that is not on hire), panel van, utility or other commercial vehicle (ie. one not designed principally to carry passengers) is exempt from FBT if the employee’s private use of such a vehicle is limited to:

• Travel between home and work;
• Travel that is incidental in the course of duties of employment;
• Non-work related use that is minor, infrequent and irregular (such as the occasional use of the vehicle to remove domestic rubbish).

The FBT exemption also applies to non-work related use by an employee’s associate that is minor, infrequent and irregular. The vehicles eligible for exemption are listed on the ATO website.

While businesses are not required to keep special records to be eligible for this FBT exemption, they will need to be able to demonstrate that the use of the vehicle meets the eligibility criteria at all times.

The ATO says it will also contact some employers who have registered a new business vehicle to ensure they are aware that non-business usage of the vehicle may result in a FBT liability.

More on cars and FBT

Employers should be particularly careful when it comes to how they record car fringe benefits.

In basic terms, a car fringe benefit arises where an employer provides a car (owned or leased by the employer) to an employee for the employee’s private use. It’s the “private use” of the car that is important here and it is that issue that often causes problems.

“Private use” is defined in the FBT law to mean any use of the car that is not exclusively in the course of producing assessable income of the employee. Home to work travel is normally regarded as private use.

The Tax Office regularly checks FBT returns concerning motor vehicles and it is an ongoing compliance issue.

There are two methods that can be used to work out the taxable value of the car – the “statutory formula” method or the “operating costs” method.

The most commonly used method is the statutory formula method because it is the much simpler method to use. The FBT is worked out by multiplying the base value of the car by a percentage determined by how many kilometres the car is driven in a year, remembering that the FBT year runs from April 1 to March 31. Those percentages are:

So, the further the car is driven, the less FBT is payable. Under this method, it doesn’t matter if the car is driven totally for business use, totally for private use, or somewhere in between.

The operating costs method requires working out the total operating costs of the car (fuel, oil, servicing, etc) and reducing that total amount by the portion of private kilometres travelled as compared to the total kilometres. It is most often used where business kilometres travelled are high, but is more complicated and requires more records (log books) to be kept and calculations to be made.

A mistake employers sometimes make concerns recording the private travel of cars.

Where a car travels a large proportion of its kilometres for business purposes, using the operating costs method (ie. recording fuel, oil, etc) can reduce its taxable value for FBT purposes and, hence, the FBT itself to be paid. Where the car is garaged at the employee’s home, the kilometres travelled for private purposes must be recorded so they can effectively be excluded from the total kilometres travelled in working out the taxable value for FBT purposes. In past years, the Tax Office has found that this was not always being done, and employers must note they need to record private travel details.

If the statutory formula is used, there are a number of traps to be wary of, and the ATO warns that it regularly comes across these errors.

• While the cost price (which includes GST and dealer delivery) is obviously part of a car’s base value for FBT purposes, registration and stamp duty are not included.
• The base value of the car also includes accessories fitted at the time of purchase such as air conditioning, tinted windows, and rust-proofing. However, the cost base does not include accessories fitted to meet the special needs of a business, such as a two-way radio in a salesperson’s car.
• When, for example, an employee is on holidays, the FBT on the car can be reduced provided the car is garaged at the employer’s premises while the employee is away.
• If the employer has owned the car for more than four years, there is an FBT saving because its base value is reduced by one-third. This is a once-only reduction and applies only to the original base value of the car.
• Actual kilometres travelled (not an estimate) must be recorded on March 31 each year in order to work out how many kilometres were travelled in the FBT year. 

SMEs should talk to their tax agent or accountant about properly complying with the FBT laws.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions .

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