• 7.5 Operating cost method

    Use the following formula to calculate the taxable value of car fringe benefits under the operating cost method:

    Taxable value = (A × B) − C

    Where:

    • A is the total operating costs
    • B is the percentage of private use
    • C is the employee contribution.

    Determining total operating costs

    For this particular purpose, the operating costs of a car include some:

    • actual costs
    • some deemed costs (that is, certain costs that are considered to have been incurred even if they have not been).

    Therefore, these total operating costs are different from those relevant for income tax purposes and include GST as appropriate.

    Actual operating costs

    The actual operating costs (including GST) are those expenses incurred for:

    • repairs, but not crash repair expenses met by an insurance company or another person legally responsible for the damage to the car
    • maintenance
    • fuel
    • registration and insurance (that is, the registration and insurance charges for the year or part of the year you used the car to provide fringe benefits)
    • leasing costs, if you lease rather than own the car (that is, the leasing costs of the car for the year or part of the year you used it to provide fringe benefits).

    You include operating costs paid by someone else (for example, an employee or associate) when calculating total operating costs of a car in a year. As already noted, an exception to this rule is that any crash repair expenses met by an insurance company or other person legally responsible for the damage to the car are not included in total operating costs.

    Deemed operating costs

    Deemed operating costs are those expenses deemed to be incurred for depreciation and interest.

    Deemed costs are relevant only if the car is owned, rather than leased. A car under hire purchase is considered to be owned by the hirer from the start of the hire purchase agreement.

    Depreciation

    You calculate deemed depreciation by multiplying the depreciated value of the car at the start of the FBT year by the deemed depreciation rate that applied at the time the car was purchased. If you did not use the car to provide fringe benefits for the full year, apportion the depreciation to reflect the period it was so used.

    The depreciated value of a car for the year in which it is acquired is the cost price, including the cost of non-business accessories. The cost price includes GST and luxury car tax as appropriate.

    You include dealer 'delivery' charges (including GST) in the cost of the car, but not registration and stamp duty charges.

    In a subsequent year, the depreciated value of a car is the cost of the car, reduced by the deemed depreciation over the period of ownership. You calculate this using the deemed depreciation rate in force at the time you purchased the car.

    You also include deemed depreciation on non-business accessories fitted to the car after its purchase. An example of a business accessory is a two-way radio in a salesman's car, while alloy wheels and seat covers are non-business accessories.

    You calculate deemed depreciation on this basis regardless of how you treat depreciation for income tax purposes.

    The income tax depreciation cost limit does not apply for FBT purposes.

    Cost price

    Cost price is generally the expenditure incurred by you or the lessor for the acquisition or delivery of the car. Usually, this is the purchase price (GST included) that has been paid, although there may be arrangements in place which have an impact on the cost price.

    For example, where an employee provides a trade-in or cash payment as part of the sale agreement, the cost price would be the purchase price minus the trade-in or cash payment. Fleet discounts and manufacturer rebates may also reduce the expenditure incurred on the acquisition of the car.

    Alternatively, where an employee pays an amount directly to you, you will need to look at the terms of any agreements and contracts in place to determine whether this payment is an employee contribution or not.

    An employee contribution does not reduce the cost price of the car.

    See also:

    Change to depreciation rate

    The FBT legislation reflects the change in effective life of cars for income tax purposes from 6.66 years to 8 years. This means that a different deemed depreciation rate applies to cars acquired on or after 1 July 2002.

    The FBT legislation has been updated to reflect the income tax diminishing value capital allowance figure for the 2008-09 FBT year onwards.

    From 1 April 2008, the depreciation rate for cars acquired on or after 10 May 2006 is 25%.

    The deemed depreciation rate changed from 1 April 2008 (the FBT year ending 31 March 2009) onwards as follows:

    Date car purchased

    FBT year ending
    31 March 2008
    (previous rates)

    FBT year ending
    31 March 2009
    and future years
    (current rates)

    Up to and including 30 June 2002

    22.5%

    22.5%

    From 1 July 2002 to 9 May 2006

    18.75%

    18.75%

    On or after 10 May 2006

    18.75%

    25%

    Interest

    You calculate deemed interest by multiplying the depreciated value of the car by the statutory interest rate. The statutory interest rate is published annually in a taxation determination and is also in the annual FBT return form instructions.

    You calculate deemed interest on this basis regardless of any actual interest costs associated with purchasing the car. If you do not use the car to provide fringe benefits for the full year, apportion the amount of interest to reflect the period it is so used.

    You also include deemed interest on non-business accessories fitted to the car after its purchase.

    Determining percentage of private use

    The percentage of private use of a car for a particular year is the difference between 100 and the percentage of business use. For example, if the percentage of business use is 75%, the percentage of private use is 25%.

    Certain requirements must be met in order to ascertain the percentage of business use of a particular car and substantiate that percentage of business use. These include keeping logbook records and odometer records - for more information, see section 7.8.

    Private use generally

    Private use is any use of your car by an employee or their associate that is not for income-producing purposes of the employee or the associate.

    Travel to and from work is normally private use, even if the employee does minor jobs such as picking up mail on the way. There are a few circumstances where travel between home and work may count as work travel. These are outlined below.

    Travel while on call

    The fact that an employee may travel to and from work in response to a call while on stand-by would not ordinarily alter the character of that travel, that is, it remains private travel.

    However, it is different where it can be determined that the employee started duties when they received the call. In this case, the journey from home to the place of employment is undertaken, not to start work, but to complete employment duties already under way before the journey started. Therefore, the travel, including the return trip, would constitute business travel.

    For example, a medical practitioner, under the terms of employment with a hospital, is required to be accessible by phone to receive emergency calls and to give immediate treatment instructions before travelling to the hospital. Therefore, their responsibility for treating the patient starts when they receive the call. Although the travel taken in response to an emergency call is considered business travel, regular daily travel undertaken by the employee to and from work, and not in response to an emergency call, is still considered private.

    This is different from the situation where an employee on stand-by duty is called on by the employer, but does not actually start duties until after they arrive at the place of employment (for example, a computer technician on stand-by duty who does not start duty until after arriving at the workplace).

    Where an employee chooses to perform some of their work at home and, as a consequence, needs to respond to a call to attend to particular duties at the office or other usual workplace, travel to and from the office or other usual workplace is private.

    Business trip on way to or from work

    Where an employee is required in their ordinary course of duties to visit clients or customers, and the travel is from their usual place of employment, it is business travel.

    Where an employee travels from home to the premises of a client or customer, the travel is accepted as business travel where:

    • the employee has a regular place of employment to which they habitually travel
    • in performing their duties as an employee, they travel to an alternative destination that is not a regular place of employment (for example, a plant operator who ordinarily travels directly to the job site rather than first calling at the depot)
    • the journey is to a location at which the employee performs substantial duties (for example, if an architect calls at a building site to check on plans on the way to the office where they are employed, this would be considered business travel).

    Employment duties of an itinerant nature

    Travel from an employee's home may be considered business travel where the nature of the office or employment is itinerant. Examples include commercial travellers and government inspectors whose homes are a base of operations, from which they travel to one of a number of locations throughout the day, over a continuing period.

    Commonly, in these cases the employee works at the employer's office periodically (for example, once a week) to complete or file reports, pick up supplies or organise future trips. Travel between home and the office made in these limited circumstances is accepted as an ordinary incident of the business travel and, as such, is also treated as business travel.

    The following characteristics are indicators of an itinerant worker:

    • travel is a fundamental part of the employee's work
    • the existence of a web of workplaces in the employee's regular employment - that is, the employee has no fixed place of work
    • the employee continually travels from one work site to another (an employee must regularly work at more than one work site before returning to their usual place of residence).

    Travel between places of employment or business

    Travel directly between two places of employment, two places of business or a place of employment and place of business is generally accepted as business travel where the person does not live at either of the places and they travel to engage in income-producing activities.

    Determining the employee contribution

    The amount that would otherwise be the taxable value of a car fringe benefit is reduced by the amount of any employee contribution.

    An employee contribution may be either:

    • an amount paid directly to you by the employee for use of the car - the employee contribution must be made from the employee's after-tax income and is included in your assessable income
    • an amount paid by the employee to a third party for some of the car's operating costs (for example, fuel) and these contributions are not included in your assessable income.

    However, the employee must provide you with documentary evidence of the expenditure (for example, receipts or invoices). In the case of petrol and oil costs, a declaration from the employee is sufficient for this purpose and receipts are not required. The declaration must be in a form approved by the Commissioner. For the approved declaration, refer to Declarations.

    An employee contribution (other than a contribution of services as an employee) is treated as consideration for a taxable supply for GST purposes. Therefore, you have to pay GST on the supply. You reduce the taxable value of the fringe benefit by the GST-inclusive amount of the employee contribution.

    An employee contribution does not have any GST implications for you if either:

    • the contribution is made through payment of an amount by the employee for some of the car's operating costs (for example, fuel)
    • you are neither registered nor required to be registered for GST.

    In certain circumstances, journal entries in your accounts can be an employee contribution.

    Example: Calculation using the operating cost method

    A car purchased by an employer in January 2008 is used privately by an employee throughout the FBT year 1 April 2008 to 31 March 2009, and:

    • operating costs (including GST, as appropriate) for that period (fuel, insurance, registration, repairs and so on) total $5,000
    • the depreciated value at 1 April 2008 is $20,000, so that depreciation at 25% to 31 March 2009 would be $5,000 (that is, 25% of $20,000)
    • the statutory interest rate is 9.00%, so that the interest component to 31 March 2009 would be $1,800 (that is, 9.00% of $20,000)
    • the percentage of private use established under the procedures outlined above is 25%
    • the employee spent $1,000 on fuel and has provided the required declaration to the employer.

    The taxable value of the car fringe benefit for the 2008-09 FBT year would be:

    A × B − C

    Where:

    • A = $11,800 (total operating costs), that is, $5,000 actual costs plus $5,000 deemed depreciation plus $1,800 deemed interest
    • B = 25% (percentage of private use)
    • C = $1,000 (amount of employee contribution).

    Taxable value = ($11,800 × 25%) − $1,000 = $1,950

    End of example
      Last modified: 15 May 2017QC 17818