Fringe Benefits Tax (FBT) arises when an employer provides a benefit to an employee (including Directors) in place of salary or wages and may include the provision of a benefit to an employee’s associate.
One of the most common benefits provided to an employee is the use of the business - owned motor vehicle for private use.
The Tax Office’s FBT legislation separates vehicles into two types.
- Firstly, passenger vehicles, which broadly includes sedans & wagons, which give rise to ‘Car Fringe Benefits’.
- The other type is ‘Commercial’ vehicles which includes vehicles with a carrying capacity of one tonne or more or a passenger-carrying vehicle designed to carry nine or more passengers. These vehicles may be exempt from FBT in certain circumstances.
The FBT considerations in relation to when Commercial vehicles are exempt from FBT is often misunderstood by employers. Firstly, the vehicle may not meet the strict definition of a Commercial vehicle. Dual Cabs are a particularly grey area as modern dual cabs have a maximum of seven passengers and the design may not allow for a carry load of one tonne or more.
The other misunderstanding is assuming that Commercial vehicles are automatically 100% tax-deductible and no FBT will apply. This is not the case as the Commercial vehicle will only qualify for the FBT exemption if the use is limited to work-related travel and other private use that is ‘minor, infrequent and irregular’.
‘Minor, infrequent and irregular’ has been open to interpretation and so the Tax Office has provided a safe harbour rule to assist taxpayers in complying with the legislation. Some (but not all) of the conditions within the safe harbour rule are:
- The employer has a policy in place which limits the private use by the employee and they obtain assurance from the employee (and employer must be satisfied on reasonable grounds on this assurance) that their private use is limited to:
i. Employee travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of the trip AND
ii. For employee journeys undertaken for wholly private purposes (other than travel between home and place of work), the employee does not use the vehicle to travel more than 1,000 kilometres in total and no single return journey exceeds 200 kilometres.
A Commercial vehicle may still be exempt if its usage does not meet the above safe harbour guidelines, but the employer will need to prove that use of the vehicle is minor, infrequent and irregular.
Now is the perfect time to review the private use of your business-owned vehicles to give you peace-of-mind!
If you have any questions about business-owned vehicles, please do not hesitate to contact your local RSM office.