13Employer provides the car or pays employee’s car expenses

A common fringe benefit provided to employees is a company car.  However, for fringe benefits tax purposes there is an important distinction between the employer providing a car to the employee and the employer making payments on a car loan taken out by the employee to buy the car; the rules for determining the taxable value of the fringe benefit in both instances are different.

Definition of car fringe benefit

Car fringe benefits are a distinct category of fringe benefit.  However, in order to be a car fringe benefit as defined, the car must be provided by either:

  • the employer;
  • an associate of the employer; or
  • pursuant to an agreement between the employer or an associate of the employer and another person.

Where the employer makes payments on a car loan taken out by the employee, this would not be a car fringe benefit as defined. Accordingly, the application of the FBT law to such payments is different to the FBT law applying to car fringe benefits.

Taxable value of car fringe benefit

For car fringe benefits, there are two methods on which the taxable value of the car fringe benefit can be calculated: the statutory formula or the cost basis.

Under the statutory formula method, the taxable value of the car fringe benefit is 0.2 times the “base value” of the car multiplied by the number of days in the year of tax that the car fringe benefits were provided divided by the number of days in the year of tax, with the result reduced by the amount (if any) of the recipient’s contribution.  For these purposes, the “base value” of the car is equal to the cost price of the car where the first day of the FBT year (1 April) of tax is on or earlier than the fourth anniversary of the provision of the car fringe benefit. If the car was provided after that fourth anniversary, the “base value” is equal to two thirds of the cost price of the car.

Under the cost basis, the taxable value of the car fringe benefit is equal to the operating costs of the car reduced by the business use percentage, with that result reduced by the amount (if any) of the recipient’s contribution.  For these purposes, the operating cost of the car includes depreciation, finance charges and operating costs.

The cost basis cannot be used unless the logbook and odometer rules have been complied with.  The logbook and odometer rules require that logbooks must be maintained for a 12 week period during the first year and every fifth year that the car is provided as a fringe benefit, and that odometer records be maintained throughout the period that the car is provided as a fringe benefit.  Such records must be in the possession of the employer by the date that the employer lodges its fringe benefits tax return, or by such later time as the Commissioner allows.

However, section 123B states:

The substantiation rules do not apply in relation to a benefit if the nature and quality of evidence that a person has satisfies the Commissioner that the taxable value of the benefit is not greater than the amount specified in the taxpayer’s return for the FBT year as the taxable value of that benefit.

Taxable value of expense payment fringe benefit

Where the employer makes payments on a car loan taken out by the employee this would be categorised under the FBT law as an expense payment fringe benefit rather than a car fringe benefit.  Therefore, the statutory formula or cost basis method is not available to calculate the taxable value of the fringe benefit.

Where there is business use of the car, the employer must rely on the otherwise deductible rule to reduce the taxable value of the car expense payment benefit.

The otherwise deductible rule for car expense payment benefit allows for two alternative ways to substantiate the business use percentage.

The first way is to comply with the Division 15 substantiation rules.  The Division 15 substantiation rules require that logbooks be maintained for a 12 week period during the first year and every fifth year that the car is provided as a fringe benefit, and that odometer records be maintained throughout the period that the car is provided as a fringe benefit.  By the date that the employer lodges its fringe benefits tax return, or by such later time as the Commissioner allows, the employee must give to the employer a car substantiation declaration for the car for the year of tax together with copies of the logbooks and odometer records.  However, as noted above, section 123B establishes an exception to the substantiation rules.

Where the Division 15 substantiation rules are complied with or Section 123B applies, then assuming the employer pays the car loan payments in full, the taxable value of the car expense payment benefit would be reduced by the business use percentage of the car.  More complicated rules apply to determine the car expense payment fringe benefit where the employer pays the car loan payments only in part.

Where neither the Division 15 substantiation rules nor section 123B apply, and by the date that the employer lodges its fringe benefits tax return, or by such later time as the Commissioner allows, the employee gives to the employer a declaration setting out:

  • the employee’s holding period of the fringe benefit;
  • the number of whole business kilometers travelled by the car during the holding period and
  • the total number of kilometers travelled by the car during the holding period;

Then assuming the employer pays the car loan payments in full, the taxable value of the car expense payment fringe benefit would be reduced by the lower of:

  • the notional deduction for the interest component of the car loan payments that would have been available to the employee if the employee had made the car loan payments, and
  • 331/3% of the taxable value of the car expense payment fringe benefit.

More complicated rules apply to determine the car expense payment fringe benefit where the employer pays the car loan payments only in part.

In light of the above analysis, any presumption that calculating the value of car fringe benefits is simple, is dispelled. Moreover, consideration should always be given to:

  • Determining whether an employer should purchase or lease the car.
  • The extent that the car is used for private or business purposes.
  • The cost of the car – the application of the statutory formula method for a luxury car essentially used for private purposes may result in a prohibitive FBT liability.
  • Ensuring that correct and accurate logbooks are maintained and updated every five years.
  • If the car is leased by the employer, whether a novated lease should be executed.