• 13 Calculation of insurance costs for the operating cost method where vehicles are covered by a single insurance policy

    Issue:

    How should Government agencies which insure vehicles under a single insurance policy, and pay a single insurance premium, calculate the insurance cost per vehicle for the purposes of using the operating cost method of calculating FBT on a car?

    Background:

    To utilise the operating cost method for calculating the taxable value of a vehicle benefit, employers are required to calculate the operating cost of the vehicle. The calculation of operating cost for each vehicle includes insurance expenses in respect of the vehicle.

    Government agencies that have a fleet of owned vehicles insure these vehicles using the Government’s general insurance fund. The insurance fund charges a single premium each year to provide insurance for all of the owned vehicles. Each year Government agencies provide a list of owned vehicles to the insurance fund to enable it to calculate the premium for the subsequent year.

    A wide variety of vehicles are covered by the policy including cars, trucks, buses, vans and motorcycles. These vehicles are also used and stored in a wide variety of locations.

    There is currently no guidance available on how insurance costs for each vehicle should be identified and calculated where the vehicles are collectively covered by a single insurance policy.

    Industry view/suggested treatment:

    Any calculation on the insurance cost per vehicle is complicated by the type of vehicles being insured, the location of the vehicles, and the use of and age of the vehicles.

    It would appear inaccurate to spread the cost of insurance evenly across all vehicles covered by the policy, as premiums for individual vehicles depend on the factors outlined above.

    It is also suggested that the process of allocating insurance costs to individual vehicles based on pre-set criteria, such as location, vehicle type, and vehicle use, would be excessively burdensome, especially where the process is repeated each FBT year. Such a process would also be highly subjective, and performed by employees with limited background in the calculation of insurance premiums.

    It is suggested that a reasonable method would be to allocate the amount of the insurance premium attributable to vehicles, across every vehicle covered by the premium. This amount would be apportioned for the FBT base value or carrying value of the vehicles covered, and the number of days the vehicle was held during the period of cover.

    As a significant amount of this data is likely to be captured in the process of completing an FBT return and obtaining Comcover insurance, such a calculation is unlikely to be overly burdensome.

    Technical references:

    Fringe Benefits Tax Assessment Act 1986

    Section 10(2)

    Section 10(3) (a) (i)

    Impact on clients:

    Low, however may increase should proposed changes to the statutory formula method of valuing vehicle benefits be implemented.

    Priority:

    Routine

    Has previous advice been sought from the ATO?

    No

    Has this issue been discussed at any other consultative forum?

    No

    ATO Response

    Paragraph 10(3)(a)(ii) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides that the operating cost of a car during the holding period will include ‘so much of any expense paid or payable in respect of insurance of the car as is attributable to the holding period’.

    The agenda item concerns a situation where an employer makes a single insurance payment to the fleet manager for all the vehicles provided by the fleet manager. The vehicles provided include a variety of cars and vehicles including trucks, buses, vans and motor cycles.

    The agenda item suggested two alternate methods for calculating the insurance expense that relates to a particular vehicle.

    The ATO advised that the question asked is a factual matter and the answer will depend upon the circumstances of the employer. Given the vast range of circumstances it is not possible to provide a method that can be used by all employers.

    Rather than providing approval for a particular method, the ATO advised members who pay a single un-dissected insurance premium and require guidance as to the method that can be used to apportion the insurance cost to a particular vehicle to request a private binding ruling in which their particular circumstances could be considered.

    In providing this advice, the ATO suggested the initial step in apportioning the insurance costs would be to contact the fleet car manager (which is an associate of the employer) to ascertain what information the fleet manager can provide in relation to the amount of the premium that relates to each car and/or the methodology used to calculate the insurance premium.

    In relation to the two methods suggested in the agenda item, the ATO noted that while the first method which involves an apportionment based on the number of vehicles may be the easiest to calculate, it is unlikely to be an appropriate method for apportioning the insurance premium between cars as this would require all the vehicles in the fleet and the risk factors of each vehicle to be identical. This is unlikely to occur where there is a wide variety of vehicles which have a range of values and different risk factors.

    The alternative method proposed involves an apportionment based on the relative value of the cars and the period for which they were held. While this method overcomes the problems associated with having vehicles of differing values, it may not be appropriate if there is a significant difference in the risk factors associated with the vehicles.

      Last modified: 03 Feb 2014QC 38409