FBT and cars have been meshed together ever since the tax was introduced, but working with the FBT laws has not become any easier. By TERRY HAYES of Thomson Legal and Regulatory.
By Terry Hayes of Thomson Legal and Regulatory
SMEs are not immune from the fringe benefits tax (FBT) bug that strikes employers around this time of year. Returns for the FBT year that ended on March 31, 2007, are due to be lodged by May 28, 2007 (when they are prepared by tax agents, which is mostly the case).
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I touched briefly on some FBT issues in my March 15 column, but it’s worth noting the results of a tax office review in NSW concerning car benefits, the most common fringe benefit provided by employers. As information for 2007 FBT returns is now being put together, employers should be particularly careful when it comes to how they record car fringe benefits.
Where car log books are used, the tax office said it found that many log books did not provide sufficient information of the use of the car. Log books are valid for five years, but must be kept for a continuous period of 12 weeks (which may straddle two FBT years). The tax rules here are strict and require that a log book entry must be made for each journey undertaken in the car during the 12-week period. Each entry must set out:
- The date on which the journey began and ended.
- Odometer readings at the beginning and end of the journey.
- The number of kilometres travelled by the car in the course of the journey.
- The purpose or purposes of the journey.
These entries must be in enough detail to establish to the satisfaction of the tax office that they are business journeys. SMEs should be aware that the tax office will not accept general descriptions such as “business” or “miscellaneous business”. Entries must be more specific, for example state the name of the client, their address and specific purpose of the journey.
An entry in a log book does not have to include the driver’s name or be signed by the person making the entry.
Another mistake employers sometimes make concerns recording the private travel of cars. Where a car travels a large proportion of its kilometres for business purposes, using the operating costs method (recording fuel, oil, etc) can reduce its taxable value for FBT purposes and, hence, the FBT itself to be paid.
I discussed the use of this method in my March 15 column. This method basically requires the application of a business-use percentage of kilometres travelled to the car’s operating costs. However, where the car is garaged at the employee’s home, the kilometres travelled for private purposes must be recorded so they can effectively be excluded from the total kilometres travelled in working out the taxable value for FBT purposes. The tax office said it found that this was not being done, and has warned employers of the need to record private travel details.
There is another area where FBT on company cars can be a trap. Where an employee with a company car goes on holidays, and leaves the car (and its keys) at his or her employer’s premises, the number of days the car is there is taken off the number of days the car is considered to be available for private use, thereby reducing the FBT payable.
For example, the taxable value of such a car is worked out on the car’s availability for 365 days of the year. If the car is left at the employer’s premises for three weeks (21 days) while the employee is on holidays, then the FBT value is only worked out on 344 days (365 minus 21).
The trap is if the employee left the company car at his home while he went away on holidays. Even though the car was not used by the employee for those 21 days, the law regards the car garaged at his home as available for private use and no reduction in the number of days is allowed. This rule is quite strict and harsh, but being aware of it can at least make employers and employees understand what they need to do to satisfy it, and thereby reduce FBT payable.
FBT is essentially all about accurate detailed record keeping. Log books can often be obtained from newsagents. In addition, the tax office has also produced a useful guide, “Fringe benefits tax: a guide for employers” which can be obtained from the tax office website.
Small businesses have been telling the Government for years that FBT is a compliance headache for them. That’s why so many use tax agents to prepare and lodge their FBT returns. The time is now to talk to your tax agent about properly complying with the FBT laws, but paying no more FBT than the law requires.
Terry Hayes is the senior tax writer at Thomson Legal & Regulatory, a leading Australian provider of tax, accounting and legal information solutions; www.thomson.com.au
To read more stories on tax by Terry Hayes click here.