Before buying a company car for your business, it is very important to take into account any possible motor vehicle fringe benefit implications. Here are a few things to consider before signing on the dotted line.
What is a fringe benefit?
Put simply, a fringe benefit arises when an employer provides an employee with a non-monetary benefit. Either in addition to or instead of monetary remuneration. It is difficult for the ATO to tax these benefits under the income tax legislation. Therefore, these benefits are assessed under the Fringe Benefits Act 1986. Any Fringe Benefit Tax (FBT) that arises, is payable by the employer, not the employee.
FBT legislation defines the term ‘car’ in a very specific way. As a general rule, fringe benefit may arise if a car is made available for the private use of an employee by the employer. There are several considerations a business owner should be aware of prior to making a new vehicle purchase.
The vehicle’s purpose by design
Regardless of how you plan to use the new vehicle, it is important to know the vehicle’s purpose by design. Is it a commercial vehicle designed to carry goods? Private vehicle for non-business use? Or somewhere in the middle?
A variety of factors assist in this matter including:
- How is the vehicle marketed?
- What are the vehicle specifications?
- What is the load and passenger carrying capacity?
There are no fringe benefit implications for vehicles that are not designed to carry passengers. Such as, trucks, vans, taxis and utilities that are designed with greater than one tonne carrying capacity. Any personal use of these vehicles by employees, employee’s partner and/or other associates, satisfies the private use exemption rules. Private use is limited to travel between home and work, incidental private travel between home and work and other private use that is minor, irregular and infrequent.
However, for vehicles primarily designed to carry passengers, there are more compliance requirements in place. This is to determine actual business use and make any private use subject to FBT.
Private Use Exemption
The ATO has recently proposed changes to the private use exemption in the form of compliance guidelines (PCG 2017/D14). The guidelines would deny access to the exemption should due care is not taken during the purchase process. Even for the most commercial vehicle purchases.
This notably includes the following requirements:
- Non-business accessories should not be fitted to the vehicle. These are accessories that are not required for the particular needs of the business operations served by the vehicle. For example, alloy wheels, window tints, spoilers, custom plates, paint protection etc.
- The purchase price cannot exceed the Luxury Car Tax threshold. This is currently $65,094 for new vehicles.
- It is not provided as part of a salary packaging arrangement to the employee/s.
- Incidental personal travel between home and work is no more than 2 kilometres in total.
- No private use of the vehicle for a single return journey is more than 200 kilometres for the year.
- The total private journeys taken during the FBT year are less than 750 kilometres in total.
These proposed changes could be a huge concern for businesses and employers. As the guidelines aim to prevent employees misusing work vehicles for personal use and stop businesses from over claiming running expenses.
This could mean, in addition to taking precautionary steps during the purchase of the vehicle, business owners may also need to complete additional time consuming documentation. As well as paying closer attention to the private use of company vehicles.
Reducing motor vehicle FBT liability
The needs of a business could result in the purchase of a vehicle deemed private in nature or design. Which may then have fringe benefit implications and possible tax payable at the end of the FBT year.
There are a few ways to reduce the taxable value of such benefits including:
- Contributions by the employee to the employer towards the motor vehicle fringe benefit’s taxable value. Cash contributions may be treated as assessable income in the employer’s financial statements. Therefore, GST would be payable on this.
- A cash contribution by the employee to the employer or directly to the car dealer. Reducing the cost price of the vehicle on purchase.
- Trade-in of employee or employer owned vehicles.
Record keeping for FBT
For vehicles not exempt from FBT and those with high business use, it is recommended to keep detailed records of the vehicle and its usage throughout the FBT year. Be aware that the FBT year starts on 1st April and ends on the 31st March of the subsequent year.
It’s important to keep a detailed logbook for business and private travel for a minimum of 12 consecutive weeks. This assists in calculating the percentage of use for business purposes and the portion of vehicle running expenses to be claimed by the business. The higher the percentage for business use, the lower the fringe benefit taxable value. That logbook can then be used for the next five years. Providing it is for the same vehicle and the overall use does not change significantly. A business is required to keep a separate logbook for each vehicle.
We have found many of our clients initial logbooks to be inadequately maintained as per ATO guidelines. This may result in the ATO denying any motor vehicle expense deductions or a higher taxable value of motor vehicle fringe benefits.
Maintaining a detailed logbook
A detailed logbook involves:
- Recording the vehicle specifications and registration number.
- Keeping odometer records from either the date of purchase or start of every FBT year. Then again at the end of the FBT year.
- Recording daily use of vehicle for a minimum of a 12-week period. This includes the total business and private kilometres travelled and the purpose of the journey including location details. More on the logbook method from the ATO website.
- There are plenty of portable electronic solutions on the market today. A built-in GPS may be attractive for your employees to keep record of the vehicle’s use, distance travelled and locations.
The following documentation is also recommended:
- The invoice for the purchase of the motor vehicle and other related documentation.
- Receipts or electronic record of motor vehicle running expenses.
- Log of the number of days the vehicle was not available for employee’s private use. Such as, if the vehicle was parked at the business premises, in secure airport parking or if it was unavailable. This could be due to things like a serious accident or major servicing. A vehicle is considered available for private use if it is kept at the home of the employee or if the employee has the car keys and can access the vehicle. Even if it is kept at the business premises.
Considering these issues before purchasing a motor vehicle will help your business avoid any fringe benefits and additional tax pitfalls. FBT is always changing, so getting expert advice to ensure you know your obligations is crucial to avoid costly mistakes.
Should you require further information, we are always here to help. Please get in touch with our team.