The Australian Taxation Office (ATO) has released new guidelines for fringe benefits tax (FBT) on work vehicles and experts are warning SME owners to reconsider how they use company cars or cars provided to employees as perks.
Fringe benefits tax is a tax paid by employers on various benefits provided to employees and their families as part of their working arrangements, acting as a way to entice workers by placing the tax liability on the business rather than the employee. It’s commonly used for things such as company vehicles, mobile phones, laptops, and protective clothing.
SMEs can then claim an FBT exemption for some of those items. For example, FBT exemption is commonly claimed for work vehicles provided that the vehicle is designed to carry less than a tonne and its private use by the employee is limited to travel between home and work, incidental work-related travel, or “minor, infrequent and irregular” non-work related use.
Prior to earlier this year, the ATO had not specified what that “minor, infrequent and irregular” use was categorised as, however, after a consultation period, it has now provided tax agents and SMEs with clear guidance on the topic.
Employees are now allowed up to 1,000 kilometres of private travel in company cars per year as long as no single return journey exceeds 200 kilometres, according to Fairfax. The guidelines apply to the 2019 FBT year and onwards.
These new guidelines, coupled with the ATO’s enhanced data matching capabilities and renewed focus on work-related expenses has led to tax agents warning businesses to be wary about what company cars they buy, and how they let employees use them.
Work cars now in “tax net”
Speaking to SmartCompany, tax agent and director of Perigee Advisers Lisa Greig says the ATO’s new guidelines are not a change in tax law or rules, but they do provide clarity on an issue that was previously fuzzy.
“It was always around ‘minor and infrequent use’, but that was a question of ‘how long is a piece of string’. Now they’ve provided this clarity and that means all these utes are now falling into the FBT tax net,” she says.
Those utes include popular double-duty cars such as Toyota Hi-Luxes or Ford Rangers, which have carrying capacities under a tonne and dual cabs, conveniently acting as both effective work and family vehicles, sneaking under the FBT exemption threshold and able to ferry around a family of five.
But with the new guidelines, employees who have been previously been using these vehicles for “minor and infrequent” private travel will now have to be vigilant in the amount they use them over the course of a year, as the penalties for businesses otherwise could be significant.
“If you get it wrong, there’s a 20% of the cost of the vehicle tax SMEs have to pay suddenly, as unless they’ve been keeping logs they have to use the statutory method,” Greig says.
This means a shiny new Toyota Hi-lux purchased with the intention of claiming an FBT exemption at $54,440 will leave the business liable for a $10,888 tax bill. Greig thinks this could be even worse for business owners who buy ritzy cars on the company dime with the intention of claiming back GST, saying it opens a “Pandora’s Box” of FBT issues.
She also believes this will put a further onus on tax agents to accurately match up data, lamenting that FBT is calculated in a different year bracket compared to the financial year — from 1 April to 31 March.
“Business owners will buy themselves a nice luxury car and all of a sudden realise they’re liable for fringe benefits, and have to pay 20% of a $120,000 sedan,” she says.
“It’s one of the things SMEs do poorly, and it gets swept under the carpet.”
Grieg believes the business owners who will be most affected by this are those who have their own vehicle purchased under the business for their own use, as that’s likely where the majority of “minor and infrequent” private use is done. For those business owners, it won’t be a sudden tax bill from the ATO, however, rather a “please explain” letter, says Grieg.
“SMEs will need to carve out what’s private use and what’s business related, and where business bookkeepers have previously said they don’t need to worry about FBT, now they’ll need to ask a few questions,” she says.
Passionate about the state of Australian small business? Join the Smarts Collective and be a part of the conversation.