For a long-time there has been the misconception that the provision of a ute (single or dual cab) to an employee is exempt from FBT, regardless of the type of ute or the amount of private usage. We have all heard the BBQ chatter where someone is spruiking they have traded-in the family sedan on a dual cab ute and saved themselves thousands in Fringe Benefits Tax (FBT). This has become more common in recent years with the significant improvements in dual cab utes to the point where they have become the number one and two best selling vehicles in Australia.
So why the misconception?
FBT is complicated and arguably the most complicated of the taxes you deal with at an operational level in your business. When it comes to motor vehicles there are many complexities, which starts with a question that should be simple, being, is a motor vehicle a “car” for FBT purposes?
Simply, the definition of a “car” for FBT purposes is a sedan, station wagon, panel van, ute or similar vehicle designed to carry a load of less than 1 tonne or fewer than 9 passengers. If this is the case the private usage of the motor vehicle is typically subject to FBT.
You will note the definition includes utes, so subject to the vehicles load carrying capacity you will need to consider FBT.
Are there any exemptions?
The private use of a motor vehicle is exempt from FBT if the following conditions can be satisfied:
- A vehicle that is not principally designed to carry passengers, and the employee’s private usage is limited to:
- Travel between home and work
- Travel that is incidental to travel in the course of duties of employment
- Non-work related use that is minor, infrequent and irregular.
Where can the application of the exemption go wrong?
- The dual cab is principally designed to carry passengers – there is a complex calculation required to make this determination.
- Minor, infrequent and irregular non-work related use goes beyond what the ATO considers reasonable.
The consideration of point 1 is complicated, but basically if the total determined passenger weight exceeds the remaining load capacity the dual cab will be subject to FBT for all private usage (including trips to and from work).
While this is an important consideration, there are many dual cabs on the market that meet this test so the application of point 2 should then be carefully considered.
What does ATO consider as minor, infrequent and irregular non-work related travel?
Until recently the ATO had provided little guidance, however last year the ATO finalised its draft ruling and issued ATO Practical Compliance Guideline PCG 2018/3 which confirms the following:
- From 1 April 2018, you will not be allowed to treat the vehicles as exempt and all private usage will be subject to FBT if private use of an eligible commercial vehicle is in excess of*:
- A 2 kilometre diversion between home and work
- 1000 kilometres in total for an FBT year (1 April to 31 March), and where no single return journey exceeds 200 kilometres.
*Unless you can demonstrate under another area of the FBT legislation that the private usage is incidental.
How do I mitigate the FBT risk?
If you choose to rely on the PCG you will need to be able to clearly demonstrate how you control and monitor the private use of eligible commercial vehicles. One way to do this is to update your company vehicle policies so they are in line with the PCG. You should also ensure your employees sign an annual declaration declaring their usage is minor and infrequent and doesn’t exceed the PCG limits.
Other important considerations from PCG 2018/3
The premise of the non-work related exemption is that the eligible commercial vehicles are provided for a genuine work related purpose, and therefore the ATO accepts there will be incidental private usage. Where there isn’t a genuine work related purpose or the vehicle is provided as part of a salary packaging arrangement, the above mentioned exemption cannot be applied regardless of the type of vehicle it is.
As mentioned earlier, with the recent improvements in dual cab utes in particular we have seen an increase in the provision of these vehicles to employees who have no reasonable work purpose and are relying on the incidental private use exemption.
Guidance from the ATO on this matter is well overdue, however they could have been far more practical with the private usage allowances.
The ATO have stated in the PCG that if an employer chooses to rely on the guidance you do not need to keep records about your employee's use of the vehicle that demonstrate that the private use of the vehicle is 'minor, infrequent and irregular'. Furthermore, the Commissioner will not devote compliance resources to review that you can access the car-related exemptions for that employee. Therefore, employers really need to ensure their policies and year end declaration are robust for eligible vehicles.
For further information or assistance with your 2019 FBT return, please contact one of your local BDO Automotive advisors.