Watch out for FBT!

The recent June 30 deadline for claiming the generous 50% temporary investment allowance tax deduction saw many car dealers, among aothers, heavily promote their products. No doubt some businesses may have been attracted by the extra tax deduction and bought new cars for the business.

The 50% tax deduction would be very welcome, but SMEs should not forget that other tax issues come with owning cars. Fringe Benefits Tax (FBT) is one of them.

In basic terms, a car fringe benefit arises where an employer provides a car (owned or leased by the employer) to an employee for the employee’s private use. It’s the “private use” of the car that is important here and it is that issue that often causes problems.

“Private use” is defined in the FBT law to mean any use of the car that is not exclusively in the course of producing assessable income of the employee. Home to work travel is normally regarded as private use.

The Tax Office regularly checks FBT returns concerning motor vehicles and it is an ongoing compliance issue. In fact, the Tax Office says that its recent checks of so-called “luxury” cars (ie. cars costing above $57,180) found that many company owned or leased cars used by employees did not account for FBT – and some large tax bills for employers were the result.

In a recent case involving an employee and an employer, an employer failed to lodge an FBT return for a number of years and when followed up by the Tax Office, received a default FBT assessment of over $100,000 (including penalties).

The employer argued in the Administrative Appeals Tribunal that the assessment was excessive and that the car was only used for businesses purposes. However, because there were insufficient records to support this claim, the AAT upheld the Tax Office assessment. The need to keep full and accurate records (eg. log books) cannot be overstated.

SME owners need to be able to prove to the Tax Office that the car was used for business purposes, so that’s why it is important to keep these records up-to-date and accurate. Don’t forget that the liability for FBT falls on the employer.

There are some key points to remember about FBT and company cars:

• Cars garaged near an employee’s home are considered available for the employee’s private use. FBT will therefore be applicable.
• If a car is garaged at or near an employee’s home, the FBT law deems it as available for the employee’s private use, regardless of whether the employee has permission to use the car privately. This is often misunderstood by employers and employees.
• The Tax Commissioner considers that the FBT law is wide enough to cover the situation where a car is garaged at the employee’s home while the employee is absent (eg. on holidays), even if the keys are left with the employer. In that situation, the car is still taken to be available for private use. To avoid this, the car should be garaged on the employer’s premises while the employee is away.
• A car will not be considered to be available for private use where it is in a workshop for an extended period for non-routine repairs or maintenance.

Not surprisingly, the Tax Office is not just checking on the private use of “luxury” cars. In April this year, it announced an Australia-wide motor vehicle data match on vehicles with a value of $10,000 or greater sold or transferred between 1 July 2007 and 30 June 2008. The Tax Office is getting these details from authorities such as the NSW Roads and Traffic Authority, Queensland Transport and Vic Roads. It expects to match about 2.5 million records.

FBT is often seen by employers as a compliance pain. But there are systems available to ease the burden of keeping the records necessary to stay on top of FBT obligations. And the Tax Office regularly reminds employers that it is better to voluntarily disclose an FBT discrepancy before it contacts them than to have the discrepancy disclosed during an ATO audit. Penalties can be minimised.

There are many rules to be remembered when complying with the FBT laws, but also some basic points to remember as outlined above. As always, your accountant or adviser is there to help.

The new temporary investment allowance laws could have been a very tax-effective way for some SMEs to acquire new assets for their businesses. But the Tax Office is aware of this too and will no doubt be sure to check claims for this deduction, including any FBT consequences, carefully.