Business owners who claim a high level of use of the company car can expect to hear from the taxman. By TERRY HAYES of Thomson Legal & Regulatory.
By Terry Hayes
The provision of a company car to an employee is the most widely offered fringe benefit. And for some employees, like sales reps, the car is an essential part of their job. But you need to tread carefully over the tax obligations.
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With company cars come tax compliance issues, especially fringe benefits tax (FBT). And although the rules concerning FBT and company cars are basically well settled, that doesn’t stop the tax office including FBT on its annual compliance check-list.
The tax office regularly comes across errors on FBT returns related to company cars, so cars frequently feature on its common FBT errors list. In its latest compliance drive, the tax office is conducting two major projects to ensure that employers are meeting their FBT obligations in relation to employee car benefits.
The tax office is sending letters regarding the projects to employers, with a covering letter and courtesy copy to their tax agents. The reviews will only cover the previous two years, except in the case of fraud.
The tax office says that employers who make a voluntary disclosure of an FBT discrepancy before they are contacted by it will not be penalised, although the general interest charge will normally apply.
Where an employer makes a full voluntary disclosure, the tax office will accord that employer a compliant status in relation to FBT car benefits.
Business-owned luxury cars
One of the projects the tax office is conducting relates to examining employers who attribute a high level of business use to a luxury car – the car might be owned or leased by the employer.
It should be borne in mind that the tax office cannot stipulate what kind of car an employer can use in its business, although tax depreciation limits apply where a car is over a certain value – the so-called “luxury car limit”, which is currently $57,123.
Employers identified by the tax office as “high-risk” (that is, those who claim a high level of business use of the car) will receive a letter regarding the tax treatment of their business-owned luxury cars plus a request for information.
The tax laws contain well-known rules for substantiating the use of a business car for tax purposes (keeping log books, etc) and for establishing the taxable value of company cars (via the statutory formula or operating costs methods), so if an employer follows those rules, there should not be a problem.
If the employer satisfies the tax office about use of the car, that should be the end of the matter. However, failure to provide the information the tax office requests could result in an audit.
Where employers lodge an FBT return and pay the FBT liability on time, the tax office says their response will be treated as a voluntary disclosure (attracting the resultant penalty concessions).
Business-owned cars and FBT lodgements
The second project concerns all business-owned cars and FBT lodgements over the past two years.
In conducting this project, the tax office is seeking to understand and quantify the revenue risk in this area.
The tax office will send out letters to employers that will include a questionnaire about business-owned cars over the past two years. The questionnaire may reveal an FBT liability, so the tax office encourages voluntary disclosures.
As an incentive to complete and return the questionnaire promptly, the tax office says no penalties and general interest charge (GIC) will apply when the questionnaire, plus FBT return and payment, are returned and lodged on time. However, the penalty and interest charge concessions will not apply if an audit is commenced.
If employers have a question regarding these projects, they can contact the tax office via the address or phone number specified on the letter.
SME owners need to be aware that the tax office is examining FBT issues surrounding the provision of company cars to employees, or the owner’s use of his or her own car in the business, especially if that car is a so-called “luxury car”.
They need to ensure they are applying the tax law correctly in this area. If in doubt, a useful start is to look at the tax office’s FBT Guide for Employers which is available on its website.
Further clarification or advice can always be sought from your accountant. Much FBT compliance is largely “by the numbers” – it’s just a matter of getting those numbers right!
Terry Hayes is the senior tax writer at Thomson Legal & Regulatory , a leading Australian provider of tax, accounting and legal information solutions.
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