Australia: Removal of statutory formula method for motor vehicle fringe benefits

Last Updated: 28 July 2013
Article by Michael van Schaik

The proposed reform will remove the statutory formula method for both salary-sacrificed and employer-provided car fringe benefits for new contracts entered into after announcement, with effect from 1 April 2014.

These changes will significantly impact fleet cars and the ability to salary sacrifice from 1 April 2014.

All car fringe benefits for new leases will be calculated using the operating cost method from 1 April 2014. The operating cost method is based on the actual business use of the car. FBT is payable on the portion of operating costs attributable to private use.

The changes are being introduced to fund the changes to the Government's Emissions Trading Scheme (ETS) from 1 July 2014. The Government will also pick up a tax windfall during the period 1 April to 30 June 2014.

Will there be any transitional measures?

The removal of the statutory method will apply to all contracts entered into on or after 16 July 2013. The effective date for these changes will be 1 April 2014.

The statutory method will continue to apply to existing contracts entered into prior to the announcement made on 16 July 2013.

Changes made to existing contracts after this date will be viewed as a material variation and trigger the new rules i.e. change in employment, releasing the existing at end of existing lease.

How will this impact you?

It is anticipated that this change will create a significant increase in costs and a substantial FBT compliance burden for providers of car fringe benefits.

The compliance costs associated with the operating cost are significantly more onerous that those required for the statutory method. Under the operating cost method employers are required to calculate the total operating cost and the business usage on a vehicle by vehicle basis. The total operating cost will include calculation of the cost of all repairs, maintenance, fuel, registration, insurance, leasing costs, depreciation (which is subject to a changing rate each year) and the cost price in respect of every single vehicle.

In addition, the operating cost method requires calculation of the business usage. For this purpose log books must be kept for a period of 12 weeks in respect of each arrangement with each vehicle. These log books must clearly detail which kilometres are business kilometres and which kilometres are private kilometres as tax will only be payable on the private use portion. The logbooks must then be kept by the employer for a period of 5 years. If there is a material change in use of a vehicle such as an increase in their usage or a change of user then a new log book will be required.

In the Government's press release the Treasurer implied that the availability of new mobile phone applications and other device applications will make maintaining logbooks a simple approach. However employers must ensure that these electronic logbooks are ATO compliant. Traditionally the process of attaining compliance is a complex one. Again, these logs must be kept for each vehicle and each arrangement.

Going forward the provision of salary sacrificed vehicles will become too costly for businesses to sustain as these vehicles are predominantly for private use.

The only good news is that the proposed arrangements only apply to 'cars'. Many dual cabs will fall outside the scope of these changes.

Brett Fowler, the leader of the Moore Stephens Automotive Services believes that the proposed changes will significantly impact upon automotive dealers as specific car valuation rules (see MT 2023) historically applied to these taxpayers using the statutory rate. These changes will doubly impact the automotive industry with the onerous reporting requirements and potential loss of sales.

What next?

The proposed reform is just that and is conditional upon Federal Labor being re-elected.

Employers will need to ensure that their existing salary sacrifice policies allow the additional FBT costs post 1 July 2014 to be passed on to the employees.

Employers will need clear guidelines as to constitute a 'business journey' for FBT purposes post 1 April 2014. Getting this wrong increases your FBT liability.

We can assist in developing and implementing these policies.

We have developed a number of strategies to significantly reduce the FBT costs associated with employer provided vehicles.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.

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