The federal government has announced it will remove the statutory formula for fringe benefits tax (FBT) for both salary-sacrificed and employer-provided cars.

The changes, which take effect from 1 April 2014, will affect vehicle contracts entered into, or materially altered, after 16 July 2013.

Under the current car fringe benefits rules, a fringe benefit will arise where an employee is provided with a car for private use. A 'car fringe benefit' is valued using either the operating cost ('log book') method or the statutory formula method.

  • Under the operating cost method, the car fringe benefit is the cost of running the car multiplied by the proportion of personal use of the car worked out by a log book.
  • Under the statutory formula method, a person's car fringe benefit is the cost of the car multiplied by 20 per cent, regardless of actual personal use of the car.

The statutory formula method provides a significant tax concession for taxpayers using their car fringe benefit mainly for private travel, because it assumes a significant proportion of the use will be for business purposes.

If an individual uses their vehicle for a significant amount of work-related travel, they will be able to continue to use the operating cost method to ensure their car fringe benefit excludes any business use of the vehicle. Fringe benefits tax will still only apply to the private portion of any benefit provided to an employee.

Employers who provide a work car to employees for occasional private use (for example, weekend travel) will also be able to still use the operating cost method.

WHO IS EXEMPT FROM THE CHANGES?

Most people claiming car expenses will be unaffected including employees, the self-employed and sole traders claiming deductions for work-related travel expenses when they use their own car for work reasons.

The changes do not affect the existing exempt car benefit concessions that apply to certain uses of taxis, panel vans, utes and other "tool-of-trade" or non-car road vehicles.

Anyone who bought a car under a novated lease before the Government's announcement will be exempt until the lease ends.

Employees will be caught up in the new FBT rules if they have a pre-announcement salary-packaged car and they change employers and want to take the car with them.

WHAT ARE THE IMPLICATIONS?

The proposed changes may have a big impact on organisations looking to hold on to top-tier employees as a recent survey of HR managers by Smartsalary revealed that 100% of managers surveyed believe employee benefits are a great driver to retention, with salary packaging and novated leasing being a functional alternative to increasing wages.

If the proposed changes become legislation it will increase the administrative burden on both employees and employers. The operating cost method will require employees to keep valid logbooks and employers will have to maintain adequate documentation of all running costs of the car such as fuel, repairs and lease payments to meet all ATO requirements. Using this method also requires an imputed interest and depreciation amount to be calculated.

Organisations whose employees commute long distances will become disadvantaged, as commutes to and from work are deemed as private.

ClarkeKann Lawyers will provide up to date information to its clients on the changes to FBT requirements as they are legislated, but if you are looking to offer a vehicle as part of a salary package to new employees from 16 July 2013, it is worth considering the possibility that additional reporting will be required.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.