Your fleet cars and tax considerations

By: James Massie-Taylor, Stephanie Sims, Stephanie Toutountzis

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Tax deductions

As a result of the COVID-19-driven Federal budget, a number of temporary measures were implemented to encourage spending and provide opportunities for businesses to claim the cost of assets immediately rather than over their effective life (being eight years for a motor vehicle and five years for a hired car).

Subject to certain criteria and depending on the aggregated turnover of your business, you can elect to claim the cost of the asset (car) upfront under the either Instant Asset Write Off (IAWO) or the Temporary Full Expensing (TFE) measures.

Whilst the IAWO and TFE schemes allow for up to a $150,000 or uncapped deduction, respectively, the schemes don’t allow a full deduction for vehicles that exceed the car limit, $60,733 for the 2021–22 year. Commercial vehicles not subject to the car limit are able to be deducted in accordance with the relevant measure. Car fleets generally contain vehicles below the car limit.

It is important to note that these measures accelerate deductions and therefore, whilst they can have a cash flow benefit, through a reduced payment of tax, there are other tax matters that should be considered including availability of franking credits when paying a dividend.

Fringe Benefits Tax (FBT)

The Australian Taxation Office’s (ATO) most recent ‘tax gap’ study showed that for 2018–19 the FBT gap was around $1.13 billion, meaning they estimate employers paid around 77 per cent of the total FBT they should have paid that year.

Further, they found the most common fringe benefit provided to employees is the use of a car, and therefore this is a focus area for the ATO to help address the gap. This means it’s crucial for employers to ensure they are reporting and paying FBT appropriately for their vehicle fleet.

A car benefit is provided if the employee is allowed to use it for private purposes or the car is garaged at the employee's home.

Once you know a benefit is being provided, FBT is calculated using a grossed up taxable value of that benefit multiplied by 47 per cent (for the 2022 FBT year). The gross up factors are based on whether a GST credit is available for the benefit.

There are two approaches to calculating the taxable value of a car:

• Statutory formula method – which applies 20 per cent to the ‘base value’ of the vehicle; and
• Operating cost method – which is the sum of the operating costs of the vehicle multiplied by the private use percentage of that vehicle (evidenced by a log book).

Under both methods, the taxable value is reduced by any after-tax employee contributions.

The methods can be changed each year and for each car depending on the quality of the records maintained and what method results in the lowest FBT liability.

Example

A $40,000 car is used for the full year, 40 per cent for business purposes. The operating expenses total $15,000.

• Statutory method taxable value = $40,000 x 20% = $8,000
• Operating cost method taxable value = $15,000 x (100% - 40%) = $9,000

Based on the above, the statutory method gives a better result.

Although stricter record keeping needs to be maintained for the operating cost method, it can result in significant FBT savings, especially when multiplying the savings across an entire fleet. The table below shows the taxable value using the operating cost method in various scenarios:

When comparing against the $8,000 statutory method taxable value, the potential savings could be significant.

Tips when calculating FBT

Base value

The base value of the car is its original GST-inclusive purchase price to the employer (whether owned or leased), including luxury car tax and the GST-inclusive cost of any non-business accessories that are added to the car.

The base value of a car does not include the cost of stamp duty, registration, insurance and extended warranties, and can be reduced further by:

• the value of a trade-in vehicle provided;
• cash payments made by an employee to the car dealer or employer to assist with the purchase; and
• fleet discounts and manufacturer rebates resulting in a reduction of the purchase price.

You do not reduce the base value of a car each year to account for its decline in value, however you can reduce the value by 1/3 after it has been owned or leased for four full FBT years.

Employers should ensure they are calculating the base values correctly and reducing the values where possible to minimise FBT.

Employee contributions

Employee contributions include an amount paid:

• directly to the employer from the employee’s after-tax income; or
• by the employee to a third party for the car's operating costs, noting substantiation is required. For petrol and oil, a declaration from the employee is sufficient, however for other operating costs the employee must provide the employer with a tax invoice.

Where possible ensure you are tracking the employee contributions constantly so that your overall FBT liability is reduced.

Commercial vehicles

Different FBT rules apply to commercial vehicles. Use of a commercial vehicle (including taxis, panel vans and certain utility vehicles) is exempt from FBT if the employee’s private use is limited to:

• travel between home and work;
• travel that is incidental to work travel; and
• non work-related use that is minor, infrequent and irregular.

Fortunately, the business is not required to keep records to be eligible for this exemption, however, you must be able to demonstrate the use of the vehicle meets the exemption criteria at all times, e.g. by frequently comparing the opening and closing odometer readings.

Note a fleet of sedans or SUVs would not be eligible for this tax exemption.

Fuel tax credits (FTC)

Whilst you may have heard of tax credits for fuel, the Full Tax Credits (FTC) regime has a limited application and only applies to certain vehicles and/or certain types of travel. Generally, FTCs will not apply to fleet vehicles, however FTCs provide businesses with a credit for the fuel tax that's included in the price of fuel used in:

• machinery and equipment (including equipment attached to a vehicle);
• heavy vehicles; and
• light vehicles travelling on private roads.

The credit depends the type of fuel and the activity it is used for. The FTC rates change regularly so it's helpful to confirm the applicable rates in your activity statement (BAS).

Fleet turnover

It can be difficult to know when the best time to replace vehicles in your fleet is, and it is different for every business. There is a fine balance between the increasing costs of vehicle maintenance as cars age and the cost of replacing the car.

Businesses will often use an age or kilometres-based approach when considering the optimum time to replace their fleet vehicles. Warranty periods and resale values are, however, the top consideration for most businesses.

Historically, 12 months or 40,000 kms has been a used as a general guide for fleet replacement, however, more recently the lack of availability of cars resulting from COVID-19 has also added another layer of complexity which has resulted in businesses retaining vehicles for longer.

When contemplating whether to buy fleet vehicles for your business or whether you already use them, there are a number of tax matters that should be considered. Where possible, maintain appropriate documentation and records for your vehicle fleet to ensure you can minimise your business’s tax liability.

Last updated: November 2021