It’s fringe benefits tax season again! The fringe benefits tax year is 1 April to 31 March. We thought we would take the opportunity to highlight one of the most common forms of fringe benefits, cars being provided to employees.
What is a fringe benefit?
A fringe benefit is a 'payment' to an employee, but in a different form to salary or wages. According to the fringe benefits tax (FBT) legislation, a fringe benefit is a benefit provided in respect of employment. This effectively means a benefit is provided to somebody because they are an employee. The 'employee' may even be a former or future employee.
Fringe Benefits and Cars
A car fringe benefit commonly arises where you make a car you own or lease available for the private use of an employee. A car is taken to be made available for private use by an employee on any day the car:
- is actually used for private purposes by the employee or associate
- is not at your premises, and the employee is allowed to use it for private purposes
- is garaged at their place of residence, regardless of whether they have permission to use it privately.
As a general rule, travel to and from work is private use of a vehicle.
The Statutory Fraction method
There have been changes to the way the statutory fraction method is calculated as the move to one statutory rate of 20% will be phased in over the next few years. When you enter into arrangements with your employee will depend on how the taxable value of the fringe benefit is calculated. FBT is levied on the taxable value of the fringe benefit once a gross up rate is applied.
Arrangements entered into before 10 May 2011
Where you have a pre-existing commitment in place to provide the car to an employee, the taxable value is calculated in accordance with the formula:
(capital cost of the car x statutory fraction x number of days in the year the car was available for use / number of days in the FBT year) - amount of the recipient’s payment
The statutory fraction rates are:
Arrangements entered into between 10 May 2011 and 31 March 2015
Arrangements entered into between 10 May 2011 and 31 March 2015 are subject to transitional rates. The calculation of the taxable value will be the same as above subject to the following statutory fraction rates:
Arrangements entered into after 1 April 2015
The most common way to calculate your FBT liability on cars provided to employees for personal use is using the statutory fraction method.
A flat statutory rate of 20% applies (subject to transitional rules), regardless of the distance travelled, to all car fringe benefits you provide after 10 May 2011. The taxable value is calculated in accordance with the formula:
(0.2 x base value of the car x number of days during that year of tax on which the car fringe benefits were provided by the provider / number of days in that year of tax) - amount of the recipient’s payment
The base value of the car will generally be the cost price.
To minimise your risk of being investigated it is important to have up to date paperwork including employee declarations and logbooks.
Click here to book a consultation with a business advisor to talk to us about what you need to do.