Restrictions on reducing Fringe Benefits Tax (“FBT”) on car expense payments
From 1 April 2016, the “otherwise deductible” rule has changed for car expense payment fringe benefits (i.e. where an employer meets or reimburses an employee for fuel or other running expenses).
Previously, employers could elect to reduce the taxable value of car expense benefits under one of three methods. The new rules now limit the calculation of the work-related use percentage of the expenses to either the logbook method or the business use method.
Under the business use method, the work-related use percentage of the car expenses is taken to be the lower of 33.33% and the estimated work-related use percentage. The estimated work-related use percentage is determined by forming a reasonable estimate based on the employee’s odometer records maintained throughout the FBT year and the patterns of use of the car during the FBT year.
Under the logbook method, the work-related use percentage is determined by maintaining records of the car’s use in a logbook for a minimum of 12 consecutive weeks.
Basically, where no logbook is kept, the work-related use percentage will be limited to 33.33%. In order to reduce FBT exposure on car expenses, the onus is on employers more than ever to ensure that staff are keeping accurate records of their personal car usage.
Note that these changes have no impact on car fringe benefits and are applicable only to the provision or reimbursement of car expenses.
Employers with fleet vehicles
The ATO released Practical Compliance Guidelines in late 2016 which provides a concession for FBT record keeping in relation to logbooks held by employees driving fleet vehicles. Under the new Guidelines, the Australian Taxation Office (“ATO“) have accepted that employers may use an ‘average business use percentage’ by taking the average of the valid logbook percentages for each car in the fleet, provided that at least 75% of the cars in the fleet have a valid logbook.
The average business use percentage can be used for a period of five years in respect of the fleet – including replacement and new cars, provided that the fleet remains at 20 cars or more. The Guidelines may also be used as a basis for determining each relevant employee’s reportable fringe benefits amount.
There are a number of requirements in order to access this FBT concession however:
- The cars are ‘tool of trade cars’ – e.g. cars used for a predominant business purpose. The position of the employee is also relevant as key executives are unlikely to be considered to have a tool of trade car;
- The employees are mandated to maintain logbooks in a logbook year;
- At least 75% of the cars have valid logbook maintained by the employer;
- The cars are of a make and model chosen by the employer, rather than the employee (or the employee has a choice of a limited range of cars);
- Each car in the fleet has a GST-inclusive value less than the luxury car limit applicable at the time the car was acquired (currently $64,132); and
- The cars are not provided as part of the employee’s remuneration package (i.e. not salary packaged).
Employers should consider whether they can qualify for the simplified record keeping concession in light of the above requirements and do comparisons to actual logbook work-related percentages recorded by employees to determine whether an average percentage is more favourable.
Luxury cars create issues for senior executives
FBT reporting on car fringe benefits is always a focus area for the ATO, however employers providing luxury vehicles to employees (often business principals and executives) will attract particular attention. The provision of company cars to senior executives will always be a common remuneration incentive, however there are a number of issues which may arise when providing a luxury vehicle to an employee.
- Whether the vehicle is an exempt vehicle for FBT purposes: FBT can be avoided where the vehicle falls within the definition of an exempt vehicle. That is, it is broadly not a ‘car’ with the principle purpose of carrying passengers – i.e. a workhorse vehicle with a carrying capacity of over one tonne. There is a wide misconception that any SUV or vehicle with the employer’s logo or signage would qualify as an exempt vehicle, however the specifications of each vehicle provided to employees should be considered to determine whether it qualifies;
- Whether private use of the vehicle is limited: The provision of a workhorse vehicle is only FBT exempt if the private use of the vehicle during the year is limited to ‘minor, infrequent or irregular’ use (other than travel or and from work). Use on the weekends is therefore likely to attract FBT. Employers should review their employee handbook and policies relating to private use of company cars.
New safe harbours for private use of workhorse vehicles on the horizon
The ATO is currently drafting guidelines which may provide a safe harbour for certain private use of workhorse vehicles. As noted above, the FBT exemption for private use of these vehicles is extremely strict. The purpose of the guidelines is to develop safe harbours that align the tax treatment with commercial realities and provide appropriate risk mitigation to employers. As this is at proposal stage only, it is not known to what extent the ATO is willing to accept private use by employees of these vehicles however any relaxing of the current rules will be a welcome change.
With many households feeling the squeeze of financial pressure, employers may find that their staff are enquiring about their salary packaging options. Salary packaging is still a tax effective option for both employees and their employers, however caution must be had as to the types of benefits that are packaged. The packaging of FBT exempt benefits, such as laptops, mobile phones, briefcases and other portable tools of trade will still provide a benefit to both parties.
Salary packaging superannuation is not considered a fringe benefit and will not attract any FBT, however care should be taken in relation to the employee’s contribution limits.
Salary packaged cars continue to remain popular, with employees on income of $87,000 or more receiving the most benefit. When structuring the employee’s salary package, employee contributions are still popular as they usually provide the greatest cash benefit to the employee. It is important that employee contributions to reduce any FBT are reviewed by employers, as often the salary packaging provider may not appreciate the FBT risks involved where contributions are not paid on time, or where there is a deficit or excess in contributions made by the employee compared with the FBT liability.