may CAR BENEFITS FBT Notes and Checklist Prepared by: Noel May & Associates March 2010 may CAR BENEFITS 1
Cars subject to FBT A car fringe benefit arises when a car which is owned or leased by an employer, an associate of the employer, or under an arrangement with the employer, is made available to an employee for any private use. A car include a motor vehicle (including a four wheel drive) designed to carry a load of less than 1 tonne and fewer than nine passengers (except a motor cycle or similar vehicle). Available for Private Use A car will be deemed to be available for private use of an employee on any day where: The car is garaged at or near the employee s residence; or The car is not on the employer s business premises, and the employee either has entitlement to use the car for private purposes, or has custody or control of the car outside working hours. An employee may have custody or control of the car even though they are not in the same location as the car (e.g.: the car is parked at the airport while the employee is travelling interstate or overseas). Where the car either commences or ends the day at the employee s home, it is considered to be available for private use. Also, where the employer operates a business from the employee s private residence (e.g.: a family company trades from the family house), the car is still taken to be available for private use when it is parked at or near home. Days Not Available for Private Use The taxable value of the car benefit can be reduced by the number of days the car was not available for private use (e.g.: the car was left at the employer s premises over the weekend or while interstate or overseas, where the car is undergoing smash repairs, etc.). Exempt Car Benefits There are a number of types of vehicles that are exempt from fringe benefits tax: Commercial vehicles - including taxis, panel vans or other vehicles not designed principally to carry passengers - where the only private travel is travel from home to work, travel incidental to travel in the course of employment or non-work related travel that is minor or infrequent. Unregistered cars - (if the car can be legally driven on the road, it is considered to be registered). There are special rules that apply to dual cab vehicles. These vehicles are designed to carry passengers (they have front and rear seats) as well as cargo (in an external cargo area). Whether a vehicle is predominantly designed to carry cargo is determined according to the weight of cargo the vehicle can carry. Calculating the Taxable Value An employer may calculate the taxable value of each car benefit in one of two ways: Statutory Formula Method - the taxable value of the car fringe benefit is a percentage of the car's value. This percentage varies with the total distance travelled by the car during the FBT year (regardless of whether or not it is private travel). The greater the distance travelled, the lower the percentage and thus the taxable value; Actual Operating Cost Method - the taxable value of the car fringe benefit is a percentage of the total costs of operating the car during the FBT year. The percentage varies with the extent of actual private use. The lower the actual private use, the lower the taxable value. A different method can be used each year assuming the appropriate records have been maintained and a different method can be used for each vehicle held. may Prepared by: Noel May & Associates 2
Statutory Method Under the Statutory Method the law deems the value of the benefit to be a percentage for the cost of the vehicle to the employer, based on total distances travelled in bands such as: Kilometres Travelled % 0-14,999 26 15,000-24,999 20 25,000-40,000 11 Over 40,000 7 The employer must keep records of the opening and closing odometer readings for each car. Odometer records must be recorded at 31 March each year, otherwise the Tax Office will adopt 26% as the appropriate statutory percentage. The higher the total distance travelled, the lower the deemed value of the benefit. Operating Cost Method The total cost of running the car for the year will include: Lease Payments Fuel/Oil Registration Insurance Repairs/Maintenance Depreciation Notional Interest Car cleaning costs, and other related costs Depreciation is calculated using the diminishing value method, at the rate of 18.75% for cars acquired after 30 June 2002, and at the rate of 22.5% for cars acquired prior to that date. This is irrespective of the depreciation rate applied to the vehicles for income tax purposes. The income tax depreciation cost limit does not apply for FBT purposes. Where the car is owned by the employer, a notional interest amount must be included, irrespective of any actual interest costs associated with the purchase of the car. The rate is applied to the FBT written down value of the car. Employee Contributions The taxable value is reduced by the payments made by the employee for the use of the car, and by any unreimbursed car expenses paid by the employee. Where the employee makes contributions toward the running of the car, it is important for the employer to comply with the substantiation and GST requirements of employee contributions. Logbook Records and Substantiation Under the Operating Cost method, employers are required to maintain odometer records and logbook records, as well as documentary evidence of the operating costs of each vehicle. The employer must maintain a record of the odometer reading at the commencement and end of each FBT year for each vehicle. Logbook records must contain entries setting out for each business journey: The date on which the journey began and the date on which it ended; The odometer readings of the car at the beginning and end of the journey; The number of kilometres travelled during the course of the journey; and The purpose of the journey. may Prepared by: Noel May & Associates 3
It is also important to note that: A logbook is required to be kept for a minimum period of 12 consecutive weeks. Where an employer is claiming expenses in respect of more than one car under the log book method, log books are required to be kept for each car. A new log book is generally required every 5 years. Log book entries are only required where the journey is for business purposes, relating exclusively to the derivation of the employee s income. The requirement for each log book entry to be signed has been removed. The purpose of the journey must be entered and it must be specific. Entries such as business or sales are insufficient. Where an employee has the use of 2 or more cars using the operating cost method, the logbooks must cover the same period for each car. Novated leases The FBT and income tax treatment of novated leases depends on whether the novation is a full or partial novation. A full novation occurs where the employee enters into a lease with a lessor, and also enters into an agreement with their employer to transfer all rights and obligations under the lease to the employer (i.e.: the employer becomes the lessee under the agreement with the lessor) There is usually also an agreement that on the occurrence of some event (e.g.: the employee leaving employment) the employer will transfer all rights and responsibility under the lease to the employee. A partial novation occurs when the employee does not transfer all rights and responsibilities under the lessee to the lessor. For example where the employee only transfers the lease payment obligations to the employer. There may also be a sublease from the employee to the employer. The FBT treatment in the case of a full novation is that the provision of the car by the employer to the employee is a car fringe benefit; the employer is generally entitled to a tax deduction for the lease fees and there are generally no income tax implications for the employee. The FBT treatment for partial novations is that the payment of the lease fees by the employer is a residual fringe benefit. The Statutory Formula method is not available in this case. The employer can generally claim a deduction for the lease fees or a notional deduction for interest and depreciation for luxury car leases. However, the employee is assessed on the amount of the lease fee received, and is not entitled to a deduction for the lease fees paid. Therefore, partial novations should generally be avoided. Short Term Car Hire Employees who are entitled to the use of a car as part of their salary package are sometimes provided with a hire car while waiting for the delivery of a new car. The Tax Office has stated where the hire period is for 12 weeks or more, it will constitute a car fringe benefit. A hire period of less than 12 weeks is a residual fringe benefit. may Prepared by: Noel May & Associates 4
CHECKLIST: - 8 Things to Prepare at 31 March 2010. Record all vehicles odometer readings at the close of business on 31 March. List the amounts that each employee contributes towards the cost of the benefit, e.g.: if an employee purchases petrol or pays for servicing costs from their own funds. List the number of days that the vehicle may not have been available for private use e.g.: when the employee is on annual leave or is interstate or overseas etc. List of all operating costs (GST inclusive) for each vehicle including fuel, repairs, maintenance, insurance, registration, leasing charges, deemed depreciation and notional interest. Collect all logbooks and ensure that they are up to date, accurate and contain all relevant details. Record details of all vehicles which have been disposed of during the FBT year. Record details of all newly acquired vehicles, new or second-hand; acquisition costs, GST, date, HP or lease terms, odometer at acquisition date, accessories. List all employees who have been provided with a vehicle for the first time. If you have any queries on the FBT treatment of Car Benefits, please telephone Noel May on 9585 7555. may Prepared by: Noel May & Associates 5