We are seeing increased audit activity in regards to the Fringe Benefits Tax treatment of luxury cars held in entities. The ATO has a national special task force accessing registration records of entities to seek out those holding luxury cars. We have been advised by the ATO that entities with one or more high value vehicles are high risk of being subject to a targeted audit. We understand that this task force has been quite successful and several assessments of Fringe Benefits Tax has resulted from this “low hanging fruit” approach. Default assessments have been issued in most instances for 4 years with a 75% penalty and interest rate.
If you hold any passenger vehicles in a company or trust and those vehicles are available to employees for private use then Fringe Benefits Tax should be considered. As the FBT year is different to a financial year for income tax purposes (runs from 1st April to 31stMarch) this can not really be left until year end to consider.
The Fringe Benefits Tax regime requires you to calculate a taxable value of the private use of goods supplied based on the availability of a vehicle for private use. The legislation provides that you can do this in two ways: The operating cost and Statutory methods. Operating cost method requires that the employee maintains a log book which establishes a private use percentage for the vehicle. This private use percentage is then applied to the FBT cost base which is essentially the GST inclusive costs incurred for the year, together with FBT deemed interest and deemed depreciation for the vehicle. The Statutory formula method has been simplified in recent years to provide that the taxable value can be calculated under this method by using the set rate of 20% over the base value of the vehicle. In the instance of a luxury car this means that the full cost is used in the base value rather than the depreciation cost limit. This means for luxury cars that you are paying FBT based on the full cost of the car, but only able to claim depreciation deductions based on the applicable depreciation cost limit. Given that FBT is assessed at the highest marginal tax rate (47%) owning a luxury car can become quite expensive from a tax perspective. This is probably best demonstrated by an example:
Jack Jackson is the director of Jackson Pty Ltd and on 1 April 2015 he purchased a BMW X5 for $125,000, Jack has diligently maintained a log book which shows he used the vehicle 88% for business and hence 12% privately, at 31st March 2016 Jackson Pty Ltd’s FBT Liability would be calculated as follows:
| Date of Purchase | 01/04/2015 | |||||||
| Cost of Car per Tax Invoice including GST & LCT | $ 125,000 | (a) | ||||||
| Dealer Delivery | $ 1,250 | (b) | ||||||
| Registration | $ 980 | (c) | ||||||
| Sports roof racks | $ 2,500 | (d) | ||||||
| Stamp Duty on Transfer | $ 3,720 | (e) | ||||||
| Total Paid for the Vehicle | $ 133,450 | |||||||
| Applicable Depreciation Cost Limit | $ 57,466 | |||||||
| Running Costs Incurred between 1/4/15 to 31/3/16 | ||||||||
| (Inclusive of GST) | ||||||||
| Insurance | $ 2,200 | |||||||
| Fuel | $ 5,500 | |||||||
| Repairs | $ 1,100 | |||||||
| Cleaning | $ 2,200 | |||||||
| Total | $ 11,000 | |||||||
| Private Use Percentage per Log book | 12% | |||||||
| 1) | Base Value of Car for FBT purposes | |||||||
| The base value of the car for FBT is the GST Inclusive cost of the vehicle excluding Registration | ||||||||
| & Stamp Duty and including any non-business accessories fitted. | ||||||||
| Hence the base value is | $ 128,750 | (f) = (a) + (b) + (d) | ||||||
| 2) | Taxable Value under Statutory Method | |||||||
| Base Value | $ 128,750 | (f) | ||||||
| Statutory Percentage | 20% | (g) | ||||||
| Taxable Value | 25,750.00 | (h) = (f) x (g) | ||||||
| FBT Gross UP | 2.0802 | (i) | ||||||
| Grossed up Taxable Value | $ 53,565 | (j) = (h) x (i) | ||||||
| FBT Payable | (@ 47%) | $ 25,176 | (k) = (j) x 47% | |||||
| 2) | Taxable Value under Operating Cost Method | |||||||
| Running Costs for the FBT year as above | $ 11,000 | (l) | ||||||
| Deemed Depreciation @ 25% | $ 32,188 | (m) = (f) x 25% | ||||||
| Deemed Interest @ 5.95% | $ 7,661 | (n) = (f) x 5.95 % | ||||||
| Operating Costs | $ 50,848 | (o) | ||||||
| Taxable Value | (12% PU) | $ 6,102 | (p) = (0) x 12% | |||||
| FBT Gross UP | 2.0802 | (i) | ||||||
| Grossed up Taxable Value | $ 12,693 | (q) = (p) x (q) | ||||||
| FBT Payable | (@ 47%) | $ 5,966 | (r) = (q) x 47% | |||||
Accordingly, if you have luxury cars in your business entity we strongly suggest the following:
- Complete a log book if your business use of the vehicle is high as this will give you a better FBT result,
- If your log book shows 100% business use or you are seeking to apply an exemption based on the vehicle being “garaged on the premises” or “unavailable for private use” you need to be able to justify that you have an alternative privately owned vehicle for private purposes.
- Ensure you discuss FBT with us and ensure you are complying with the requirements,
- Ensure that you have Tax Audit Insurance. Unfortunately even if you are doing the right thing, responding to these audits is time consuming and can be costly.
Should you have any queries or concerns regarding the FBT implications of luxury cars in your businesses, please contact us.