Issue #8
FBT – CARS IN THE FIRING LINE
Two major ATO car benefit projects underway
Car benefits are commonly the highest value of fringe benefit category provided to employees.
The ATO has advised that it has two major projects underway to ensure that employees are meeting their FBT obligations in relation to car benefits.
Project 1 relates to employers who attribute a high level of business use to a luxury car. Employers identified as high-risk, and their tax agents, will receive a letter regarding the tax treatment of their business-owned luxury cars plus a request for information.
Project 2 relates to all business-owned cars and FBT lodgements over the past two years. Letters associated with this project will include a questionnaire requesting information about business-owned cars over the past two years.
Under both projects the ATO are focused on three issues that employers continue to get wrong:
- logbooks not providing enough information about the car’s use
- where a car is garaged at an employee’s residence and the employer is claiming substantial business use for the car using the operating cost method, but there is no record in the logbooks of business travel being made
- employee contributions being incorrectly treated for income tax and GST purposes.
Employers who make a voluntary disclosure of an FBT discrepancy before being contacted by the ATO will not be penalised although the general interest charge will apply.
Generally, the ATO projects will only review the previous two years, except in the case of fraud.
We are already receiving calls from clients in receipt of questionnaires under Project 2. In many instances, the operating cost method has been used but inappropriate log book documentation held.
What information must a logbook record?
An employer using the operating-cost method to calculate the taxable value of a car fringe benefit needs to include the following details for each business journey:
- the date on which the journey began and on which it ended
- the odometer readings at the start of each journey, and
- the kilometers travelled and the purpose of the journey.
Entries made under the category of ‘purpose of the journey’ must be in English and detailed enough to show why a journey was for business purposes – simply describing a journey as ‘business’ or ‘miscellaneous business’ is not enough.
Also, remember that the odometer records for the car must be kept each FBT year when using the operating-cost method.
Employee contributions
The ATO will pay particular importance to ‘employee contributions’ towards car fringe benefits that have been recorded by way of journal entry.
Miscellaneous Tax Ruling MT 2050 outlines the requirements to be met before a recipient’s contribution by journal entry will be acceptable for FBT purposes. Simply making a journal entry at years end is not enough!
The ruling provides that journal entries in an employer’s accounts are a payment of a “recipient’s contribution”, “recipient’s payment” or “recipient’s rent” for fringe benefits tax purposes provided all of the following conditions are met:
- the employee has an obligation to make a contribution to the employer towards a fringe benefit;
- the employer has an obligation to make a payment to the employee; and
- the employer and employee agree to set-off the employee’s obligation to the employer against the employer’s obligation to the employee.
If payment of an employee’s contribution is to be by journal entries, those entries may be made at the time the books of account are written up for income tax purposes.
Other potential hot spots
Although not specifically highlighted by the ATO, it is our view that the provision of ‘exempt vehicles’, specifically utilities and dual cabs, will also be targeted.
The ‘work related’ FBT exemption as it applies to utilities and dual cabs requires no private use of the vehicle during the FBT year other than work related travel and other private travel that is minor, infrequent and irregular. Work related travel for the purposes of the exemption is defined as travel between the employees residence and place of employment (or place where the employee performs duties of employment) and travel that is incidental to travel in the course of the employee performing their employment duties.
If an employer is providing a V8 ute to a young male employee can the employer be sure that private travel is limited to travel that is minor, infrequent or irregular? Would an employee using their ute to travel to football training and games an the weekends be minor, infrequent or irregular? Would an employee using their ute to travel to the coast to go surfing each weekend constitute minor, infrequent or irregular travel? The ATO may take some convincing.
Refer to Appendix A (bottom of page) for the operation of the ‘work related’ exemption for vehicles (less than and one tonne or more).
Time to prepare
It seems that in addition to crowded roads, proposed congestion levies, soaring fuel prices, outrageously high parking costs and road rage employee motorists and their employers can now add FBT to their list of woes!!
As part of the preparation of the 2008 FBT return it is an opportune time for employers to place particular emphasis an cars given the ATO’s interest in this benefit category.
When preparing the FBT return an employer needs to determine:
- Has a car benefit been provided?
- Does an exemption apply?
- If not, has the taxable value been calculated correctly?
- Has the benefit been categorised correctly as a Type 1 or Type 2 benefit?
- Has all required documentation been obtained?
Only by answering yes to all the above questions will an employer obtain a degree of comfort that their car fringe benefits will stand up to any ATO review.
This edition of ‘The Assessment‘ was prepared by Rob Power. If you have any comments in regards to the contents of this edition please feel free to pass them on to Rob at robp@webbmartinconsulting.com.au .
STOP PRESS!!!
Have you applied the minor benefit exemption to the maximum extent possible under the Commissioner’s revised views? If not, you could be missing out on considerable FBT savings.
Our next edition will outline the Commissioners revised interpretation of the minor benefit rule in section 58P.
