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Fringe benefits tax - a guide for employers

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Chapter 21 - Employee cars - applying the 'otherwise deductible' rule

 Remember, a fringe benefit may be provided by another person on behalf of an employer. It may also be provided to another person on behalf of an employee (for example, a relative).

Various chapters in this guide describe a four-step procedure for calculating the reduction available under the otherwise deductible rule. Step   2 of the four-step procedure is calculating an amount that hypothetically would have been allowable as an income tax deduction to the employee. However, you have to use a different step   2 where the costs of operating the employee's own car are involved. Three methods are available, with different substantiation requirements and varying results.

21.1 Explanation of methods

First method - logbook record

• Logbook records and/or odometer records must be maintained by, or on behalf of, the employee, as explained in section   21.2 .
• The employee must provide the logbook records and/or odometer records (or copies of them) to you by the due date for lodging your annual fringe benefits tax   (FBT) return or, where you are not required to lodge a return, by 21   May.
• Using the formula described in section   21.3 , you calculate the percentage of business use. You then use this percentage when applying the otherwise deductible rule, with step 2   modified as follows:

 Step Action 1 Ignoring any payment or contribution made by the employee, calculate the taxable value of the fringe benefit. 2 Multiply the step 1 amount by the percentage of business use calculated according to the formula described in section   21.3 . 3 Now look at any payment or contribution made by the employee. How much of this payment or contribution is allowable as an income tax deduction to the employee? 4 Subtract the actual deductible amount (step   3) from the hypothetical deductible amount (step   2). The result is the amount by which the taxable value of the fringe benefit may be reduced.

Second method - car travelled 5,000 business kilometres or more

• This method can't be used unless the car has travelled a minimum of 5,000 business kilometres during the year.
• The employee must provide a declaration to you by the due date for lodging your annual FBT return or, where you are not required to lodge a return, by 21   May. The approved format for such a declaration is shown in section   21.6 (sections A and B must be completed).
• Because the car has travelled a minimum of 5,000 business kilometres during the year, the percentage of business use is deemed to be 33   1/3% (the actual percentage of business use is irrelevant). You then use the deemed percentage of business use when applying the otherwise deductible rule, with step   2 modified as follows:

 Step Action 1 Ignoring any payment or contribution made by the employee, calculate the taxable value of the fringe benefit. 2 Multiply the step 1 amount by the deemed percentage of business use - that is, 33   1/3%. 3 Now look at any payment or contribution made by the employee. How much of this payment or contribution is allowable as an income tax deduction to the employee? 4 Subtract the actual deductible amount (step 3) from the hypothetical deductible amount (step   2). The result is the amount by which the taxable value of the fringe benefit may be reduced.

Third method - no logbook and no requirement to travel 5,000 business kilometres or more

• The employee must provide a declaration to you by the due date for lodging your annual FBT return or, where you are not required to lodge a return, by 21   May. The approved format for such a declaration is shown in section   21.6 (sections A and C must be completed). The declaration requires the employee to calculate a percentage of business use from the other information in the declaration.
• The maximum percentage of business use that may be used is 33   1/3%. It is used when applying the otherwise deductible rule, with step   2 modified as follows:

 Step Action 1 Ignoring any payment or contribution made by the employee, calculate the taxable value of the fringe benefit. 2 Multiply the step 1 amount by the percentage of business use specified on the employee declaration (the maximum is 33   1/3%). 3 Now look at any payment or contribution made by the employee. How much of this payment or contribution is allowable as an income tax deduction to the employee? 4 Subtract the actual deductible amount (step 3) from the hypothetical deductible amount (step   2). The result is the amount by which the taxable value of the fringe benefit may be reduced.

21.2 Logbook and odometer records

 This section is relevant only to the first method described in section   21.1 .

In a logbook year, both logbook records and odometer records must be maintained by, or on behalf of, the employee. In a year that is not a logbook year, odometer records must be maintained.

A year is a logbook year if:

• none of the previous four years were a logbook FBT year for that car (for example, when a car is first used for business or employment-related purposes)
• you elect to treat the year as a logbook year (for example, to monitor the percentage of business travel), or
• the Commissioner of Taxation, by written notice, requires you to treat the year as a logbook year.

The logbook records contain a record of business use and are usually maintained for a 12-week period. The odometer records are a record of the total distance travelled during the same 12   weeks that the logbook records are maintained, and also of the total distance travelled in each year.

You should maintain records of additional information, such as the car's make, model, registration number and percentage of business use, as part of your business records.

21.3 Estimating the percentage of business use

 This section is relevant only to the first method described in section   21.1 .

You calculate the percentage of business use of a car using the following formula:

 A B X 100

Where:

A = your estimate of business kilometres travelled by the car during the FBT year (or part-year, as the case may be).

B = the total kilometres actually travelled by the car during the same period.

The business use percentage and your estimate of the business kilometres must be entered into your business records by the due date for lodging your annual FBT return or, where you are not required to lodge a return, by 21   May.

Estimating the business kilometres travelled in a logbook year

When estimating the business kilometres travelled in a logbook year:

• a logbook recording details of business journeys undertaken in the car must be kept for a continuous period of at least 12   weeks, as well as odometer records of total kilometres travelled during that period
• odometer records of the total kilometres travelled during the year must be kept
• you must estimate the number of business kilometres travelled during the full FBT year (or part-year if appropriate). The estimate must take into account all relevant matters, including the logbook records, odometer records, any other records you keep, and any variations in the pattern of business use throughout the year, for example, holidays or seasonal factors.

Estimating the business kilometres travelled in a year that is not a logbook year

When estimating the business kilometres travelled in a year that is not a logbook year:

• you must keep odometer records of the total kilometres travelled during the year (or part-year if appropriate)
• you must estimate the number of business kilometres travelled during the full FBT year (or part-year if appropriate). The estimate must take into account all relevant matters, including the logbook records from the logbook year, odometer records for the current year, any other records you keep, and any variations in the pattern of business use throughout the year, for example, holidays or seasonal factors.

Replacement cars

If you have replaced a car during the year, the replacement car may be treated as though it were the replaced car for the purposes of complying with the requirements outlined in section   21.5 .

If you kept logbooks and odometer records during the year, or in a previous year, for the purpose of estimating a business percentage for the replaced car, that percentage may be transferred to the new car if it remains appropriate.

The transfer of a business percentage in this way is conditional on you recording in your business records the make, model and registration number of both cars and the date on which the replacement was made. These entries must be made on or before 21   May (or such later date as is agreed on for lodging the annual return). Odometer records kept for the cars during the replacement year must show details of the odometer readings of both the replaced car and the new car on the replacement date.

21.4 Information to be recorded in logbook records

 This section is relevant only to the first method described in section   21.1 .

We don't produce an official logbook. You are entitled to keep records of your own design, or to purchase one of the many commercial products available. However, the following details must be entered in the logbook for each business journey :

• the date(s) on which the journey began and ended
• the odometer readings at the start and end of each journey
• the kilometres travelled
• the purpose of the journey.

The logbook records must be in English and entries must be made at the end of the trip or as soon as reasonably practicable afterwards.

Where two or more business trips are undertaken consecutively on any day, only one entry for the series needs to be recorded in the logbook. For example, an entry for a salesman who called on 10 customers while working in the Bathurst-Orange area of New South Wales could record the odometer readings at the start and end of the consecutive journeys and describe the purpose of the travel as '10   customer calls, Bathurst-Orange area'.

The period during which the logbook was kept must be specified in the logbook at the end of the logbook period.

21.5 Information to be recorded in odometer records

 This section is relevant only to the first method described in section   21.1 .

Odometer records are a record of the total kilometres travelled by the car during the FBT year or, if the car was not used to provide fringe benefits for the whole year, for that part of the year when it was used for this purpose.

Odometer records should also be kept for the same period for which a logbook is kept.

We don't produce an official odometer record. You are entitled to keep records of your own design, or to purchase one of the many commercial products available. However, the following details must be entered in the odometer records for the beginning of each period (that is, year, part-year or logbook period) and also for the end of each period:

• the date the period began, or ended, as the case may be
• the odometer reading at the start of the period, or at the end of the period, as the case may be.

The odometer records must be in English, and the entries should be made at the times the readings relate to, or as soon as reasonably practicable afterwards.

If you replace a car during the year and transfer the business percentage to the new car, the odometer records must also include an entry showing odometer readings for the replaced car and the new car on the replacement date.

21.6 Employee declaration

 This section is relevant only to the second and third methods described in section   21.1 .

In order to substantiate the percentage of business use of an employee's car, the employee must provide a declaration to you. The declaration should be in the approved form for that type of benefit. However, the information contained in the Employee's car declaration must be extended by the addition of either section B or C (whichever is appropriate). For a list of employee declarations refer to Declarations .

21.7 Special rules under the new law for applying the otherwise deductible rule to jointly owned cars and for jointly provided fringe benefits

Where an fringe benefit (loan fringe benefit, expense payment fringe benefit, property fringe benefit and residual fringe benefit) is provided jointly to an employee and an associate in relation to an income earning asset, the new law operates in conjunction with the existing rules to only allow the taxable value of the fringe benefit to be reduced by the employee's share of any deductible amount.

The new law also applies for fringe benefits provided jointly to an employee and associate where this chapter applies rules for valuing employee car fringe benefits. In these cases, the amount ascertained as the reduction available under this chapter forms the 'unadjusted notional deduction', as described in chapter   8.8A, 9.4A, 17.5A and   18.7A.

Example:

A car is owned jointly by an employee and associate (50% each) and applied by both persons to derive assessable income. A valuation under this chapter is required because of the extent of the documentation held. The deduction otherwise available under this chapter will be reduced to the employee's share of any deductible amount - that is, to 50% of the 'unadjusted notional deduction'.

• Determination TD   93/90 - Income tax: does the 'otherwise deductible' rule apply to reduce the taxable value of fringe benefits provided to associates of employees?

The following tables detail any major changes and updates made to this chapter.

February 2010

 Section Changes and updates 21.7 Special rules under the new law for applying the otherwise deductible rule to jointly owned cars and for jointly provided fringe benefits Included information about the new law for the otherwise deductible rule and jointly owned cars and for jointly provided fringe benefits.