Recent government initiatives expanding the instant asset write off (IAWO) measure by increasing the threshold to $150,000 and extending the measure to 31 December 2020 combined with the temporary full expensing of depreciating assets measure (TFEDA) which applies from budget night to 30 June 2022 has arguably contributed to a dramatic increase in car sales in Australia.
According to data released by the Federal Chamber of Automotive Industries (FCAI) car sales in Australia increased in January 2021 by 11.1% from February 2021 with the private buyer market was up by 25.4%.
Drilling down into the data, SUVs accounted for 52.1% market share with light commercial utes and vans a further 21.9%.
So what does this data mean for business owners and what is the connection with the IAWO and TFEDA?
Business taxpayers taking the opportunity to purchase vehicles with the intention of claiming an immediate deduction either under the IAWO or TFEDA may face an unexpected fringe benefits tax (FBT) liability if the vehicle was purchased before 31 March 2021 and has been used or held available for the private use of an employee.
Similarly, where the vehicle is held for the private use of a shareholder or associate of a private company, there may be an exposure to deemed Division 7A (Div7A) assessable dividends.
Exempt car benefits and vehicles that are not cars for FBT
There is a common misconception among business owners and some advisers that certain vehicles are exempt from FBT. This misconception extends to vehicles designed to carry a load of more than one tonne which are not cars for the purposes of FBT, and cars that may fall within a specific definition under exempt car benefits in the Fringe Benefits Tax Assessment Act 1986 (FBTAA86).
In general terms, the load-carrying capacity of a vehicle is taken to be the gross vehicle mass (GVM) of the vehicle as specified by the compliance plate by the manufacturer, reduced by the kerbside weight. As mentioned previously, where the load-carrying capacity is greater than one tonne, the vehicle will not be a car for the purposes of FBT, however satisfying that criteria does not mean the employer is exempt from an FBT liability.
The employer will not have an FBT liability where the use of the vehicle by an employee solely consists of travel between eligible work-related travel or private use is minor, infrequent, and irregular.
Where the private use conditions are not satisfied, there may be a residual fringe benefit and if the employer has not maintained records to readily identify the private use (e.g. logbook, electronic logbooks, GPS data) calculating the FBT liability may prove challenging.
Business owners are cautioned on making modifications to vehicles with a load-carrying capacity of less than one tonne based on vehicle specifications at the time of manufacture in order to satisfy the greater than one-tonne threshold. If vehicle modifications result in the load-carrying capacity exceeding one tonne, the ATO may not accept the modifications satisfy the required threshold to effect a permanent modification to the vehicle, and irrespective, the private use may still result in a residual fringe benefit.
If an employee is able to use the vehicle for private travel, there is little or no escape from FBT.
Cars, utilities, vans, and motorcycles with a load-carrying capacity of under one tonne, and where the principal purpose is not for carrying passengers may fall within an FBT exemption for certain car benefits, but only where the private use meets certain criteria. Again, it is not the car itself that is exempt, it is the private use of the car that may be eligible for an exemption.
Typically we see business owners seeking to claim an FBT exemption under this provision for dual-cab utes. ATO Practical Compliance Guideline PCG 2018/3 provides guidelines as to when the private use of a dual cab vehicle may be exempt from FBT. As with vehicles other than cars, determining the load-carrying capacity and whether the dual cab is principally designed to carry passengers is a complex calculation. It requires consideration of the GVM and kerb side weight based on the vehicle compliance plate and original manufacturer data, along with separate consideration of vehicle modifications (if any).
Once the determination has been made, consideration must then be given to the private use of the vehicle. PCG 2018/3, which applies to the 2019 and later FBT years, sets out the Commissioners view of what constitutes minor, infrequent, and irregular private use. Under the PCG, minor, infrequent, and irregular private use includes:
- No more than a 2 km private travel diversion between home and work;
- No single return private journey in the FBT year that exceeds 200 km; and
- No more than a total of 1,000 km of private travel in the FBT year.
Whilst the Commissioner has indicated the ATO will not devote compliance resources to reviewing whether employers can access the car-related exemptions under this exception (provided the requirements in the PCG are satisfied), employers are cautioned the ATO is embarking on a significant data matching program in respect of new car purchases. Businesses with new car purchases should review their policies and record-keeping processes for compliance.
Employers who have relied on declarations from employees in respect of the private use may still be exposed to an FBT risk, particularly if, as a result of ATO review, the employee is not able to adequately support their private use claims with contemporaneous documentation. Private use policies may not be reliable where the employer can not demonstrate they have actively enforced the policy.
Business owners are reminded that where a new vehicle is a car for the purposes of FBT, the car cost limit will apply and despite the IAWO and TFEDA measures, any allowable tax deduction will be limited to the car cost limit which is $59,136 for the 2021 financial year.
The car cost limit however does not apply when determining the base value of a car for FBT purposes which can leave business owners exposed to a substantial FBT liability or, in the case of shareholders or associates of private companies, exposure to a deemed Div7A assessable dividend in respect of the private use of the vehicle.
With the ATO expected to increase audit activity in the coming months and an anticipated focus on FBT compliance, businesses that have purchased new vehicles under a presumption the purchase cost is fully tax-deductible, or that the private use is exempt from FBT are advised to seek advice from a taxation specialist.
HOW CAN RSM HELP?
If you have concerns around the FBT liability arising from your recent vehicle purchase, or for a more extensive FBT ‘health check’, reach out to your local RSM office who can connect you with an RSM FBT specialist.