What is Fringe Benefits Tax?
As a recap from last week’s Fringe Benefits Tax (FBT) blog from Kirstie Smith, FBT rules tax employers on certain non-cash benefits provided to employees or an associate of an employee, such as a spouse.
FBT is levied at the top marginal tax rate (47% for the 2023 FBT year) so it’s important to ensure these benefits are treated correctly and minimised where possible.
The FBT year runs from 1 April to 31 March, with lodgements and payments due on 21 May, or 25 June if lodging through a tax agent.
There are also several specific exclusions from FBT, depending on what kind of fringe benefit is provided.
There are many different types of benefits that are captured by the FBT Regime as highlighted in Kirstie’s FBT blog, but the focus for this blog is on car fringe benefits.
Car Fringe Benefits
A car fringe benefit arises when a car that is held by an employer, is made available for private use by an employee or an associate of an employee.
A car is typically held by an employer when it is owned or leased by the employer (including under a bona fide novated lease arrangement).
There are several key principles to look into to determine whether a car fringe benefit is being provided.
Is it a Defined Car?
A car is defined in by legislation as a motor-powered road vehicle (except a motorcycle or similar vehicle) designed to carry a load of less than one tonne and fewer than nine passengers. Therefore, the following types of vehicles (including four-wheel drive vehicles) are cars:
- Motor cars, station wagons, panel vans and utility trucks (excluding panel vans and utility trucks designed to carry a load of one tonne or more)
- All other goods-carrying vehicles designed to carry less than one tonne
- All other passenger-carrying vehicles designed to carry fewer than nine occupants
Is it Available for Private Use?
FBT only applies to your employee's private use of your car, not their business use.
It is said to be made available for private use in the following instances:
- Not at the business premises and the employee is allowed to use it for private purposes
- Garaged at the employee’s home
If you have provided a Car Fringe Benefit, it is recommended to do the following:
- Maintain a valid logbook recording their personal and business travel
- Record the closing odometer of their vehicle on 31 March of each year
Do any Exemptions Apply?
The provision of a car benefit may be exempt if:
- The vehicle is one of those listed as a vehicle capable of being exempt or known as an eligible vehicle; and
- When private use of the vehicle is strictly limited to so-called ‘work-related travel’ which can include some minor elements of private travel, and travel between home and work. The ATO has provided guidelines on what this constitutes requirements including the following:
- the vehicle had a GST-inclusive value less than the luxury car tax threshold at the time the vehicle was acquired ($84,916 for fuel efficient vehicles and $71,849 from 1 July 2022),
- the vehicle is not provided as part of a salary packaging arrangement and the employee cannot elect to receive additional remuneration in lieu of the use of the vehicle,
- the employer has a policy in place that limits private use of the vehicle and obtain assurance from its employee that private use is limited to use as outlined below,
- your employee uses the vehicle to travel between their home and their place of work and any diversion adds no more than 2km to the length of that trip; and
- for journeys undertaken for a wholly private purpose (other than travel between home and place of work), the employee does not use the vehicle to travel:
- More than 1,000km in total, and
- A return journey that exceeds 200km.
You don't have to keep special records to be eligible for the exemption. However, you must be able to demonstrate that the use of the vehicle meets the limited private use conditions at all times.
For example, you could regularly compare the opening and closing odometer readings of the vehicle with the total distance you expect the employee to travel between home and work.
How do you Calculate the FBT?
The taxable value of a car fringe benefit can be calculated using either of the methods listed below:
Statutory formula method
Based on the car’s base value. A statutory rate of 20% applies to the car’s base value
Operating cost method
Based on the costs of operating the car. The percentage of private use of a car for a particular year is the difference between 100 and the percentage of business use.
You can choose whichever method returns the lowest taxable value so long as you have the appropriate records.
Are there Ways to Reduce my FBT?
The two most common ways we see employers reduce their FBT liability is through either providing benefits that would be deductible for the employee or through employee contributions.
Providing benefits that would be deductible for the employee
An FBT liability can be reduced if you give an employee a benefit they would have been able to claim as an income tax deduction if they themselves had paid for it. This is called the 'otherwise deductible' rule.
Using employee contributions
An FBT liability can also be reduced by having your employee contribute towards the cost of a fringe benefit. The contribution is usually a cash payment to you or the person who provided the benefit.
The Federal Government put forward a Treasury Laws Amendment (Electric Car Discount) Bill 2022 that passed royal assent last month. This means that new Electric Cars are now exempt from Fringe Benefits Tax.
For more information read Blake’s blog on FBT for electric cars.
What Should I do Now?
If you have provided any fringe benefits to employees during the last twelve months, it is advisable to speak to a trusted accountant or business adviser on how the FBT rules apply to your business and what record keeping requirements need to be satisfied.
In addition, if your business offers salary packaging arrangements to employees, now is a good time to review those arrangements to ensure they are considered 'effective salary sacrifice arrangements'.