Page 38 - Chermside Guide June Issue
P. 38

The provision of company cars to employees is a regular practice across the Australian business landscape. Generally, there are two reasons to provide a car to an employee:
1. It’s a requirement of the job that employees travel regularly for work purposes, so providing a car will allow employees to effectively perform their duties.
2. Employers want to give themselves an advantage over their competitors being ‘employers of choice’, attracting the best and brightest, by converting non-deductible private vehicles to tax deductible company cars for their employees.
Granting employees access to company cars is treated by the ATO as a non-cash benefit, more commonly referred to as a fringe benefit. Fringe benefits provided to employees and/or their associates are subject to Fringe Benefits Tax (FBT), which is currently set at a flat 47 per cent of a benefit’s taxable value.
With the tax rate for fringe benefits set at 47 per cent, the obvious question is: why would small business owners grant an employee access to a company car? Considering that the great majority of Australian taxpayers are currently paying marginal tax rates of between 34.5 per cent and 39 per cent (for the 2021 financial year and including the Medicare levy),
it seems counter-intuitive to allow this. After all, this does translate to an additional 8 per cent to 12.5 per cent tax liability that could be avoided if the employee was simply given a pay rise.
The answer to this question lies in how the taxable value of the fringe benefit (i.e. the car) is calculated. The taxable value of a car fringe benefit is meant to reflect an employee’s private use of the vehicle, as only the private use of the car is subject to FBT. Additionally, the FBT law allows employee contributions to reduce the taxable value of the car fringe benefit.
If the taxable value of a car can be reduced to nil, then no FBT will be payable. As such, employers are inadvertently provided an avenue to provide employees with extra value without incurring additional expenses.
So, the question now is, how does the ATO calculate the taxable value of a car fringe benefit? Through one of two calculation methods: operating cost or statutory formula.
Operating costs uses the log book method and statutory formula (no log book) you multiply the vehicle costs by a flat 20 per cent per FBT year.
CTBS Confidential Tax & Business Services
07 3267 2111

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