Edited version of private ruling

Authorisation Number: 1011631013076

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Ruling

Subject: Car fringe benefit

Question 1

Can the log books kept in the year ended 31 March 2010 be used in the calculation of the taxable value of the car fringe benefits in the years ended 31 March in the relevant years?

Answer

No.

Question 2

Will the Commissioner exercise his discretion under subsection 123B(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to accept the taxable value of the car fringe benefits that arose in relation to the cars for which log book records are not available is not greater than the amount returned?

Answer

No.

Question 3

If amendments are made to include the disclosed taxable values of the car fringe benefits using the statutory formula method, will shortfall penalties be applied in relation to the amended assessments?

Answer

No.

Question 4

If amendments are made to include the disclosed taxable values of the car fringe benefits using the statutory formula method, will GIC be applied in relation to the amended assessments?

Answer

GIC will be applied in relation to the period from the due date for payment to the date on which you advised the Tax Office of the amount of the adjustments.

This ruling applies for the following periods

1 April 2005 to 31 March 2006

1 April 2006 to 31 March 2007

1 April 2007 to 31 March 2008

1 April 2008 to 31 March 2009

The scheme commenced on

1 April 2005

Relevant facts and circumstances

Your internal auditors have conducted a review of the use of the cars that you held during the relevant years ended 31 March.

The review identified that during these years car fringe benefits arose from the use of a number of these cars. In calculating the taxable value of these car fringe benefits you had used the operating cost method to calculate a nil value.

In reviewing these calculations the review identified that for a number of these cars:

· logbooks were not retained; or

· logbooks were not maintained for the full 12 week log book period specified in subsection 162H(1) of the FBTAA; or

· the narration for the purpose of the journeys was either not completed, or was insufficient to show the business purpose; or

· opening and/or closing odometer readings were not kept for the log book period.

Each of the years was a logbook year of tax.

Fully compliant log books were kept for each of the cars in the year ended 31 March 2010.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 10(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 10(4)

Fringe Benefits Tax Assessment Act 1986 Subsection 10(5)

Fringe Benefits Tax Assessment Act 1986 Section 10A

Fringe Benefits Tax Assessment Act 1986 Section 10B

Fringe Benefits Tax Assessment Act 1986 Subsection 93(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 123B(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 123B(3)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 162F

Fringe Benefits Tax Assessment Act 1986 Subsection 162G(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 162H

Taxation Administration Act 1953 Section 8AAG(2)

Taxation Administration Act 1953 Division 284

Taxation Administration Act 1953 Subsection 284-75(1)

Taxation Administration Act 1953 Subsection 284-215(2)

Reasons for decision

1. Can the log books kept in the year ended 31 March 2010 be used in the calculation of the taxable value of the car fringe benefits in the relevant years ended 31 March?

During the years ended 31 March in the relevant years car fringe benefits arose from the use of cars which you held.

In calculating the taxable value of these car fringe benefits you are able to use either the statutory formula method as set out in section 9 of the FBTAA or the operating cost method set out in section 10 of the FBTAA.

In deciding which method to use subsection 10(1) of the FBTAA enables the employer to make an election to use the operating cost method. However, this election is subject to subsection 10(5) of the FBTAA which provides that an election will not be deemed to have been made if the taxable value using the operating cost method would be greater than the taxable value using the operating cost method.

In each of the years you made an election to use the operating cost method for each of the cars.

The method that is used under the operating cost method is set out in subsection 10(2) of the FBTAA which states:

Subject to this Part, where an election is made under subsection (1), the taxable value, or the aggregate of the taxable values, as the case requires, of the car fringe benefits in relation to the employer in relation to the year of tax that relate to the car while it was held by a particular person (in this section referred to as the "provider") during a particular period (in this section referred to as the "holding period") in the year of tax is the amount calculated in accordance with the formula:

(C × (100% - BP)) - R

where:

C is the operating cost of the car during the holding period;

BP is:

(a) if, under section 10A or 10B, the employer is not entitled to a reduction in the operating cost of the car on account of business journeys undertaken in the car during the holding period - nil; or

(b) (Omitted by No 145 of 1995)

(c) in any other case - the business use percentage applicable to the car for the holding period; and

R is the amount (if any) of the recipient's payment.

Section 10A provides that the employer will not be entitled to a reduction in the operating cost of the car on account of business journeys undertaken during a log book year of tax unless certain documentation has been maintained. Section 10A states:

Where one or more car fringe benefits in relation to an employer in relation to a year of tax relate to a car while it was held by a particular person (in this section called the ``provider'') during a particular period (in this section called the ``holding period'') in a year of tax that is a log book year of tax of the employer in relation to the car, the employer is entitled to a reduction in the operating cost of the car on account of business journeys undertaken in the car during the holding period if, and only if:

(a) log book records and odometer records are maintained by or on behalf of the provider for an applicable log book period in relation to the car; and

(b) odometer records are maintained by or on behalf of the provider for the holding period; and

(c) if the provider is not the employer - those log book records and odometer records are given to the employer before the declaration date; and

(d) the employer specifies the employer's estimate of the number of business kilometres travelled by the car during the holding period; and

(e) the employer specifies a percentage as the business use percentage applicable to the car in relation to the provider for the holding period

Section 10B sets out the documentation that must be maintained in a non-log book year of tax.

As each of the years was a log book year of tax for the relevant cars a reduction under the operating cost method can only be made if the requirements of section 10A are satisfied. They require:

· 'log book records' to be maintained for an 'applicable log book period';

· 'odometer records' to be maintained for an 'applicable log book period',

· the employer to specify the employer's estimate of the number of business kilometres travelled by the car during the holding period; and

· the employer to specify the business use percentage applicable to the car for the holding period.

At the time the returns were lodged you made an estimate of the number of business kilometres travelled and the business use percentage. However, to satisfy the requirements of section 10A it is necessary for both 'log book records' and 'odometer records' to be maintained for the 'applicable log book period'.

The definition of 'log book records' contained in subsection 136(1) of the FBTAA requires the following information to be recorded for each 'business journey' undertaken by a particular car:

· the date on which the journey began and the date on which it ended

· the respective odometer readings of the car at the beginning and end of the journey

· the number of kilometres travelled by the car in the course of the journey, and

· the purpose of the journey.

'Applicable log book period' is defined in subsection 162H(1) to mean:

For the purposes of the application of section 10 in relation to a car fringe benefit in relation to an employer in relation to a car while it was held by a particular person during a particular period (in this subsection called the ``holding period'') starting or ending in a year of tax, a reference to the applicable log book period is a reference to:

(a) if the holding period is a period of less than 12 weeks - the holding period; or

(b) in any other case - a continuous period of not less than 12 weeks that begins and ends during the holding period.

In applying the definition of 'applicable log book period' to section 10A it can be seen that the period for which the 'log book records' and 'odometer records' are kept must be in the log book year of tax. It is not possible to use 'log book records' and 'odometer records' that relate to a later year of tax.

In addition, section 162F requires the employer in estimating the number of business kilometres travelled to take into account the log book and odometer records kept for the car. From a practical perspective, this can only occur if the records have been kept at the time the return is prepared. At that stage, it is not possible to use records that are kept in a later year.

It should also be noted that the Explanatory Memorandum to Taxation Laws Amendment (FBT Cost of Compliance) Bill 1995 in explaining the changes that were made to the calculation of the business use percentage stated:

Log book records, etc, will still be required

The employer will still be required to keep a log book and odometer records, which may be used to support the estimate of business kilometres together with any other relevant records.

The Commissioner's discretion to permit an employer not to keep a log book or odometer records if the requirement to do so is unreasonable will be removed.

Therefore, in applying these provisions section 10A does not permit a reduction in the operating costs of the cars for which log book and/or odometer records were not kept for an applicable period during the log book year of tax. Further, it is not possible to use the log book and odometer records that were kept in a later year of tax.

2. Will the Commissioner exercise his discretion under subsection 123B(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to waive the substantiation rules when considering the calculation of the taxable value of the car fringe benefits for those cars for which log books were not kept in the years ended 2006, 2007, 2008 and 2009?

Specific relief from the substantiation requirements exists in the form of a Commissioner's discretion under subsection 123B(1) of the FBTAA which states:

The substantiation rules do not apply in relation to a benefit if the nature and quality of evidence that a person has satisfies the Commissioner that the taxable value of the benefit is not greater than the amount specified in the taxpayer's return for the FBT year as the taxable value of that benefit.

Under subsection 123(3), the Commissioner may only make a decision under subsection (1):

(a) in the course of reviewing on the Commissioner's own motion the affairs of the employer; or

(b) in considering an objection against the assessment of the employer of the year of tax; or

(c) in considering whether to make an amendment of the assessment of the employer of the year of tax in response to a request made by the employer before the commencement of this section.

Guidance for considering the application of this subsection is provided by Taxation Ruling TR 97/24 Income tax: relief from the effects of failing to substantiate which explains the operation of subdivision 900-H of the Income Tax Assessment Act 1997 (ITAA 1997).

In broad terms, subdivision 900-H sets out three circumstances in which the Commissioner can grant relief from the income tax substantiation requirements. One of the circumstances is where there is sufficient evidence to indicate that the taxpayer has incurred the expense and is entitled to a deduction.

The use of the discretion in a situation where there is sufficient evidence is discussed in paragraphs 40 to 47 of TR 97/24. Paragraphs 40 to 45 state:

40. The central issue in deciding whether this discretion ought to be exercised is whether the evidence available:

(a) satisfactorily quantifies the amount of the expense; and

(b)  establishes the extent to which the taxpayer is entitled to claim a deduction.

41. It is not possible to specify the nature and quality of supporting evidence that satisfies the Commissioner in all circumstances. Each case must be considered on its own merits and a common sense approach applied.

42. When deciding whether to exercise this discretion, the Commissioner is not limited to considering documentary evidence. A wide variety of factual information can be relevant. For example, in deciding whether the Commissioner is satisfied that car expenses have been incurred and are deductible to the extent claimed, a relevant piece of evidence might be that a particular motor vehicle is used in operating a driving school rather than merely occasionally in producing assessable income.

43. A bona fide attempt to comply with the substantiation requirements is likely to assist taxpayers in relation to the nature and quality of the evidence they hold.

44. If a taxpayer has made little or no attempt to comply with the substantiation requirements, the nature and quality of supporting evidence available is likely to be poor. It is the clear intention of the substantiation provisions that deductions are generally not allowed where there is no supporting documentation or factual material evidencing the expense.

45. In cases where there has been a failure to comply with the substantiation requirements, the taxpayer may face practical difficulties in satisfying the Commissioner that the claimed amount of an expense has been incurred and is deductible. Such cases frequently involve estimates by the taxpayer of expenses incurred. An unsupported statement by a taxpayer as to the amount of an expense incurred does not, of itself, constitute evidence of a nature and quality to satisfy the Commissioner that the discretion should be exercised.

In applying these guidelines, you do not have any documentation which can be used to determine the business use percentage in the relevant years. Although you have log book and odometer records for a later year, this information does not substantiate how the cars were used during the earlier log book year.

The FBTAA has a clear requirement for an employer who wishes to reduce the operating costs under the operating cost method in a log book year of tax to keep both log book and odometer records. This requirement exists for all employers.

In view of this requirement, the lack of any supporting documentation means the discretion in subsection 123B(1) can not be exercised in relation to the calculation of the business use percentage in the log book years of tax.

Support for this conclusion is provided by paragraph 13 of TR 97/24 which states:

It is the Commissioner's view that relief is not available where there is no supporting documentation or factual material evidencing the expense. It follows that a taxpayer's estimate of an expense supported only by an assertion that the estimate is reasonable does not constitute evidence of a nature and quality to satisfy the Commissioner to exercise the discretion.

Therefore, the taxable value under the operating cost method of these car fringe benefits will be equal to the operating cost of the car. Where this amount is more than the amount that would be the taxable value under the statutory formula method the taxable value will be calculated under the statutory formula method.

In either situation, it will be necessary to amend the assessments for the relevant years to include the increased taxable values.

3. If amendments are made to include the disclosed taxable values of the car fringe benefits using the statutory formula method, will shortfall penalties be applied in relation to the amended assessments?

Broadly, subsection 284-75(1) of the Taxation Administration Act 1953 (TAA) imposes a penalty where an entity or its agent makes a statement to the Commissioner that is false or misleading and there is a shortfall amount as a result of the statement.

In the relevant years you did not include the taxable value of the car fringe benefits in your FBT returns. This caused a tax shortfall that can be subject to an administrative penalty.

The amount of the penalty depends upon the base penalty amount that is worked out using the table in section 284-90 of the TAA. This table sets out the percentages that are to be applied depending upon whether the shortfall was the result of an intentional disregard of a taxation law, recklessness or a failure to take reasonable care to comply with a taxation law.

However, this base penalty will be reduced by at least 80% under subsection 284-225(2) of the TAA where the entity tells the Commissioner about a shortfall amount before the earlier of:

· the day the Commissioner tells the entity that a tax audit of their financial affairs for that accounting period is to be conducted; or

· the day by which the Commissioner has publicly requested voluntary disclosure from entities about a transaction that applies to the financial affairs of that entity.

As you have made an unprompted disclosure of the tax shortfall this 80% reduction will apply.

Under section 298-20 of the TAA the Commissioner has the discretion to remit all or part of that penalty. Guidelines on the way in which this discretion will be exercised are provided in Practice Statement Law Administration PS LA 2006/2. Paragraph 137 of PS LA 2006/2 states:

In exercising the discretion regard should be had to the following objectives of the penalty regime:

· The purpose of the penalty regime is to encourage entities to take reasonable care in complying with their tax obligations. What is reasonable will depend on the circumstances of each case. However, as a general rule, the larger the item, the greater the level of care required.

· A major objective of the penalty regime is to promote consistent treatment in respect of the rates of penalty imposed. That objective would be compromised if the penalties imposed at the specified rates were remitted without just cause, arbitrarily or as a matter of course. The Commissioner must ensure that the decision to remit in part or full or not to remit at all is made in good faith and is reasonable. All relevant matters and no irrelevant matters must be taken into consideration in making the decision.

· Entities with a good compliance history^F6 should be encouraged to remain compliant by treating them more leniently than entities which do not have a good compliance history.

· An entity without a good compliance history bears a heavier burden of proof in justifying why remission is warranted. A penalty should not be remitted if the only reason given by the entity is that the understatement or over-claim was the result of carelessness, ignorance as to liability to tax or the fault of their agent.

· The discretion to remit penalties should be administered in a fashion which ensures that the objectives of the penalty regime (for example, to effect improvements in future compliance by taxpayers and to provide certainty for those taxpayers) are achieved without causing unintended or unjust results.

In applying these guidelines it is noted that you have a good compliance history and have made an unprompted voluntary disclosure. In such a situation, paragraphs 148 and 149 of PS LA 2006/2 state:

148. Where an entity has taken reasonable care no subsection 284-75(1) penalty applies. In those circumstances if an entity voluntarily discloses an error or if subsequent action by the Tax Office leads to a correction of the error this will not give rise to a penalty under subsection 284-75(1).

149. Even if the facts show that reasonable care was not taken, the penalty imposed by the legislation is still reduced if a voluntary disclosure is made. As discussed at paragraphs 120 to 124 where an entity makes an unprompted voluntary disclosure the penalty on a shortfall amount will be reduced by at least 80% because subsection 284-225(2) applies. Any penalty which remains after the statutory reduction will be remitted in full unless there is information to indicate that the entity did not make an honest mistake or it can be reasonably inferred that it was not an honest mistake.

As the error in calculating the tax liability was the result of a genuine misunderstanding of the legislation it cannot be inferred that it was anything but an honest mistake. Therefore, the penalty will be remitted in full.

4. If amendments are made to include the disclosed taxable values of the car fringe benefits using the statutory formula method, will GIC be applied in relation to the amended assessments?

Section 8AAG of the TAA enables all or part of the GIC to be remitted in appropriate circumstances.

Subsection 8AAG(2) of the TAA allows the Commissioner to remit the charge if the Commissioner is satisfied that one of the following situations exists:

· the circumstances that contributed to the delay in payment were not due to, or caused directly or indirectly by, an act or omission of the person; and the person has taken reasonable action to mitigate the effects of those circumstances; or

· the circumstances that contributed to the delay in payment were due to, or caused directly or indirectly by, an act or omission of the person; and the person has taken reasonable action to mitigate the effects of those circumstances; and having regard to the nature of those circumstances, it would be fair and reasonable to remit all or part of the charge; or

· there are special circumstances by reason of which it would be fair and reasonable to remit the GIC, or part of the GIC.

Guidance on the situations in which a remission will apply are provided in chapter 93 of the ATO Receivables Policy. As set out in paragraph 16, the GIC is intended to encourage the payment of tax liabilities when due. It denies late payers an advantage over those who do pay on time.

We consider that full or partial remission of GIC may be warranted where:

· the underpayment of the tax resulted from factors beyond the control of the taxpayer. Foe example, Australian Taxation Office error or mislead by TaxPack

· the understatement was due to interpretation of the law for which there was judicial or quasi-judicial authority at the time of lodgement, or

· there are special circumstances to remit the GIC.

Based on the above guidelines, we do not consider that the particular circumstances of your case warrant remission of GIC.

Although you made a voluntary disclosure, this by itself is not a special circumstance that warrants the remission of the GIC. Therefore, the GIC will not be remitted.

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