By Shell on Oct. 30, 2019
You need to determine whether you will need to pay Fringe Benefits Tax (FBT).
“If a car is bought by a company, all costs will be deductible against the company’s income, but you will be required to comply with FBT legislation,” says Chartered Accountants Australia and New Zealand Senior Tax Advocate Susan Franks
What is FBT?
FBT is a tax employers pay for a benefit paid to an employee that isn’t a salary or wage. It’s calculated separately to income tax and based on the taxable value of those benefits.
The Australian Tax Office (ATO) says employers may be providing a car fringe benefit if they make a vehicle they own or lease available to an employee for private use.
Are all company vehicles subject to FBT?
FBT isn’t payable on vehicles that aren’t principally designed to carry passengers. Certain panel vans, single-cab and dual-cab utes and 4WDs can qualify for an FBT exemption if they are:
- Designed to carry a load of one tonne or more;
- Designed to carry more than eight passengers;
- Not designed for the principal purpose of carrying passengers.
“How it’s determined a vehicle isn’t designed for the principal purpose of carrying passengers isn’t straightforward,” says Susan. “Ask your accountant whether the vehicle you’re proposing to buy can meet this criteria.”
This exemption is also tied to strict conditions surrounding private use of the vehicle.
“You still won’t qualify for the FBT exemption unless private use of such a vehicle is limited to travel between home and work, or is minor and infrequent,” says Susan.
The ATO has full guidelines for both issues – go to www.ato.gov.au for more information.
How do I calculate FBT?
Businesses can calculate the taxable value of FBT using one of two methods:
- Statutory formula method: Calculated by applying 20 per cent to the price of the vehicle paid by the company.
- Operating-cost method: Based on the costs of operating the vehicle as documented via a logbook.
Businesses will have different reasons to choose one method over the other. “The statutory formula is generally more generous for most taxpayers and the default method of calculation,” says Susan. “(But) drivers with a high level of business use may be better off adopting the operating-cost method.”
What do I need to track?
It’s crucial to monitor the level of business and private use of a company car and well as all associated expenses.
“The ATO recently released its estimate of the small-business tax gap – the difference between the amount of tax paid and the amount that should have been paid,” says Susan. “This tax gap is the largest the ATO has measured. One of the main issues driving it is failing to account for private use of business assets.”
This is particularly important if you’re using the operating-cost method to calculate FBT. The logbook must detail every journey over a continuous 12-week period. Go to www.ato.gov.au for the full guidelines.
“Keeping a logbook requires effort,” says Susan. “That 12-week period needs to be representative of your travel throughout the year.” It’s just as vital to keep copies of all vehicle-related invoices and receipts so you can claim your expenses.
“Lack of documentation of expenses was another big factor in the small business tax gap,” says Franks. “There are now electronic methods of storing and retrieving receipts electronically that make income-tax compliance easier than managing that old shoebox.”