Fringe Benefit Tax (FBT) Series 2 - Car

In Part 1 of our FBT series, we covered the basics of FBT. Now, let’s dive into one of the most common (and commonly misunderstood) types of fringe benefits: car fringe benefits.

If your business provides a car to an employee (including you as a director) and they use it for private purposes, this is likely a car fringe benefit, and it may attract FBT.

What Counts as a “Car” for FBT Purposes?

The ATO defines a car for FBT purposes as a motor vehicle (including 4WDs and SUVs) that is designed to carry:

• A load of less than 1 tonne, and

• Fewer than 9 passengers.

Please note that it does not matter if the car is owned or leased when you are considering whether FBT applies. If the car is leased and provided to your employee for their private use, FBT still applies.

FBT Exempt Use of Eligible Vehicles

However, your employee's limited private use of a UTE, Van or other eligible vehicle may be exempt from FBT. Those eligible vehicles include:

• a single cab UTE

• a dual cab UTE that is designed to either

  • carry a load of 1 tonne or more

  • carry more than 8 passengers (including the driver)

  • carry a load of less than 1 tonne but is not designed for the principal purpose of carrying passengers.

• a panel van or goods van

• an eligible electric car (For further details of electric car, please read the article here link)

• a taxi

• any other road vehicle that is designed to carry either

  • a load of 1 tonne or more

  • more than 8 passengers (including the driver)

What is a Car Fringe Benefit?

A car fringe benefit arises when a car owned or leased by the employer is made available for an employee’s private use.

“Private use” includes:

• Driving to and from work

• Using the car on weekends or holidays

• Any travel that is not strictly work-related

Even if the car is garaged at the employee’s home, the ATO considers it to be available for private use, and that alone may trigger FBT.

Calculating the Car Fringe Benefit

There are two main methods for calculating the taxable value of a car fringe benefit:

• Statutory Formula Method: A statutory rate of 20% applies to the company car’s base value, which is the cost price you (or a lessor) paid for the car.

• Operating Cost Method: This method is based on the costs of operating the car (including deemed costs for depreciation and interest) , multiplied by the percentage of private use of the company car (taken from a log book) in the FBT year.

If the employee pays for private use (e.g. reimburses part of the car costs from after-tax income), those employee contributions reduce the taxable value of the benefit and therefore reduce your FBT liability.

How to Reduce or Minimise Car FBT

The following strategies can be considered to minimise Car FBT:

• Use the Operating Cost Method (if business use is high): If your employees mostly use the car for work, the operating cost method can reduce FBT, provided a valid logbook is maintained.

• Encourage Employee Contributions: As mentioned above, if your employees pay for part of the car’s private use (from after-tax income), those contributions directly reduce the taxable value of the benefit.

• Use Eligible Work Vehicles: Certain commercial vehicles, such as UTEs, Vans (over 1 tonne carrying capacity) or eligible electric cars, may be exempt from FBT, as long as their private use is limited to minor, infrequent travel (e.g. quick detour for groceries).

• Limit Private Use: Structure your HR policies and employment agreements to limit or prohibit private use of company cars. Also, keep documentation that supports the car was unavailable for private use during periods like service, repairs, or employee leave.

• Use Low Base Value Cars: Since the statutory formula is based on the original cost of the car, choosing more affordable vehicles (or keeping cars longer) can reduce the FBT base.

• Utilise Reduction of Base Value of a Car: You can reduce the base value of a car by one-third in the FBT year that starts after you or your associate have owned or leased the car for 4 years. The reduction applies from 1 April after the fourth anniversary of the date on which you or your associate first owned or leased the car (the car does not need to be held continuously). The reduction applies only once for a particular car and you then use the reduced base value for subsequent years. The reduction does not apply to non-business accessories added after you or your associate acquired the car.

Now What Should You Do?

If your business provides vehicles to employees, you should consider to:

• Review how your cars are used

• Check if your logbooks are up to date

• Choose the right valuation method

• Assess whether any exemptions apply

• Consider employee contributions as a tax strategy

Coming Up Next…

In Part 3 of our FBT series, we’ll look into electric cars and FBT implications for those in more details.

If you need help reviewing your FBT exposure, calculating car fringe benefits, or minimising your liability, reach out for a quick chat — we’re here to help (https://www.goodpca.com.au/contact-us).

Disclaimer

This content is intended as a general guide for GOOD PEOPLE ACCOUNTING SERVICES clients. The information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Although every effort has been made to verify the accuracy of the information contained above, GOOD PEOPLE ACCOUNTING SERVICES disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information.