Car Fringe Benefits – Proposed Changes

Aug 22, 2013 | Business, ITR

Lauren Bromley

The Federal Government has announced the proposed abolition of the fringe benefits tax statutory formula method for cars acquired, or car provision arrangements materially altered from 16 July 2013. The abolition of the statutory formula method will have a significant impact on the car industry, employers and employees.

Under the current car fringe benefits rules, a fringe benefit will arise where an employee is provided with a car for private use. A ‘car fringe benefit’ is valued using either the operating cost (‘log book’) method or the statutory formula method.

  • Under the operating cost method, the car fringe benefit is the cost of running the car multiplied by the proportion of personal use of the car worked out by a log book.
  • Under the statutory formula method, a person’s car fringe benefit is the cost of the car multiplied by 20 per cent, regardless of actual personal use of the car.

Previously the statutory formula method would provide a significant tax concession for taxpayers that use their car fringe benefit mainly for private travel, because it assumes a significant proportion of the use will be for business purposes.

Arrangements to provide car fringe benefits which were in place prior to 16 July 2013 will not be affected by the changes and the statutory formula method can continue to be used indefinitely unless the arrangement is materially varied or renewed (e.g. the car is re-leased). 

It will also mean that salary package arrangements (most commonly via novated leases) entered into from 16 July 2013 will not result in any tax savings for employees and in most cases won’t be worth entering into given the administration involved.

  • In addition to the impact on FBT costs, the changes will result in significant increases in administration and compliance requirements for employers including:
  • Requiring employees to keep valid log books at least every five years in order to be able to claim any reduction in FBT for business use.
  • Recent advances in technology, such as cheap and easy-to-use car log book ‘apps’, make this much easier to maintain records, and many of these apps will let the GPS on a smart phone do most of the work for you and let you send the results directly to your employer or tax agent — no calculations required.

Whilst it must be understood that this has not passed as actual law at this stage It is still recommended that all clients keeps these proposals in mind when entering into any new arrangements regarding Motor Vehicles, for further information please contact our office.

See below example of additional costs involved under Labour’s plan:

Under the statutory formula method, the value of the benefit is calculated as follows: 

Cost of the Car X Statutory Percentage X Days Vehicle Available for Private Use / Days in the Year less Employee Contribution

Employee Contribution is any after tax payment made towards the cost of the car that has not been reimbursed.

Notional value of the vehicle: $29,000 
Number of kilometres driven in the year: 15,000 
Days available for private use: 365 
Contributions made by employee: Nil

Value of the benefit= Cost of the Car X Statutory Percentage X Days Vehicle Available for Private Use/Days in the Year less contribution
 =29,000 X .20 X 365/365 – Nil
 = 5,800
Grossed up value of benefit= 5,800 X 1/(1 – 0.465)
 = 5,800 X 1.8692
 = 10,841

The grossed up amount of $10,841 would appear on the employee’s payment summary

The FBT cost to the employer would be $5568.49

Under the operating cost method, the value of the benefit is calculated as follows: 

Total operating Costs X Percentage of private use less Employee Contribution

Notional value of the vehicle: $29,000
Number of kilometres driven in the year: 15,000
Days available for private use: 365
Contributions made by employee: Nil

Operating Costs =Lease Costs$8,230
 Fuel$2,000
 Repairs$850
 Registration$600
 Insurance$600
 Total$12,280

A logbook has been maintained for a continuous period of 12 weeks with the following business use percentage of 25%

Value of the benefit= Total Operating Costs X Percentage of private use less contribution
 =12,280 X .75 X 365/365 – Nil
 = 9,210
Grossed up value of benefit= 9,210 X 1/(1 – 0.465)
 = 9,210 X 1.8692
 = 17,215

The grossed up amount of $17,215 would appear on the employee’s payment summary

The FBT cost to the employer would be $8,842.38

If you would like to discuss this further please contact Lauren Bromley of our office.

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