It is rare for highly valued employees to be remunerated solely in cash. Typically, a ‘remuneration package’ includes a combination of cash and non-cash incentives.
Non-cash incentives inherently give rise to the potential imposition of fringe benefit tax (FBT) and one of the most common forms is the private use of a vehicle.
FBT on vehicles is neither new nor rare. However, we invariably encounter errors in FBT calculations due to the murky and complicated nature of the rules and principles that apply. One of the fundamental starting points to keep in mind is that FBT is merely a proxy for PAYE. The FBT rates are a ‘gross up’ of a net salary/wage amount, ie. $100 @ 33% = $33 of tax, so a fringe benefit value of $67 @ the FBT rate of 49.25%, also equals $33. If I were to digress, I would suggest that we get rid of FBT completely and suggest it is simply included within the PAYE return, on a gross up basis. But I won’t deviate, let’s stay on track.
Your most likely thought is, ‘how can I minimise my FBT liability on vehicles provided to employees?’ But this shouldn’t be your starting point. The important question is, when vehicles are provided to employees, how much private use do you want them to have? It should then be a case of practically restricting a vehicle’s use to that level, and that drives the amount of FBT payable.
The concept of being ‘available for private use’ can be misleading. The key thing to remember is that if a vehicle is available to an employee for private use, FBT is payable whether or not the vehicle is actually used. By definition, if a vehicle is used for home to work travel that will be captured as private use. However, if a vehicle qualifies as a “work related vehicle”, that same travel from home to work is not considered private use.
To qualify as a work-related vehicle it can’t be designed to principally carry passengers (eg. a Ute will qualify as a work related vehicle). The name of the employer’s business also needs to be identified permanently and obviously on the vehicle’s exterior (eg. sign written). A common error is to treat a sign written sedan that is never used to carry passengers as a work-related vehicle. Finally, it needs to be a condition of employment that the employee stores the vehicle at home.
Restrictions on private use should be agreed in writing and monitored to avoid FBT. For example, if an employee is restricted from using a work-related vehicle at the weekend, then the employer should periodically take the odometer reading on Friday afternoon and Monday morning, the difference should be the distance from work to home, and back. If documentation is put in place, but it is found that the employee and employer are ‘quietly’ ignoring the restrictions, the paperwork will be ignored and FBT is likely to apply.
When it comes to calculating the FBT payable, the quarterly equation appears to be simple enough: work out the proportion of days that the vehicle was available for private use during the quarter, and multiply this by the relevant vehicle value and a specific percentage. However, each of these elements can be easily misunderstood.
There are certain instances where a vehicle is deemed to be not available for private use, and thus such days are excluded from the FBT calculation. Specific exclusions include: when a vehicle is stored on the business premises; if the vehicle is used for an emergency call between 6pm and 6am; and the employee travels out of town for business.
Once an employer has determined the private use proportion for a vehicle, this is multiplied by the vehicle’s value. There are two methods available to determine a vehicle’s value – either the cost price method, or the tax book value (TBV) method. The TBV method is the original cost price (including or excluding GST depending on the rate) less its total accumulated depreciation at the start of the FBT period. A minimum value of $8,333 applies when using the TBV method.
Once an employer has chosen which method to use for a particular vehicle, they must continue to use the same method for that vehicle for five years. Typically, the cost price method is used from acquisition because the TBV method front loads the FBT liability. After five years employers should then switch to the TBV method, which should give rise to a reduction in the annual amount of FBT payable. Cue our next common error: Where there is a switch from the cost method to the TBV method after five years, the minimum amount of $8,333 is not an automatic option. The $8,333 minimum is only applicable where a vehicle’s TBV is less than $8,333.
As a general rule, FBT is calculated based on GST inclusive vehicle values. GST exclusive values can be used, but the fringe benefit calculation percentage needs to be adjusted accordingly. The quarterly percentage using the cost price method is adjusted from 5% to 5.75%, and the percentage using the TBV method adjusts from 9% to 10.35%. A common error is to use the GST exclusive vehicle values multiplied by the lower of each applicable rate. Another misunderstanding is to apply the 5% rate to all vehicles, even when the TBV method has been used.
FBT can be frustrating because it takes considerable time to calculate, for what can seem like a small amount of tax. But it is worthwhile reviewing both the availability on which FBT is being calculated and the calculation itself. There may be savings to be had or errors to be identified, both of which can add up over a period of time.
The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.