Edited version of your written advice

Authorisation Number: 1012835787518

Date of advice: 10 July 2015

Ruling

Subject: Fringe benefit tax: otherwise deductible rule

Question

Is an expense, to repair to a vehicle held by an employee that is paid by the employer exempt from Fringe Benefits Tax as a result of the otherwise deductible rule?

Answer

No the payment of the expense will not be an exempt benefit and the otherwise deductible rule will not apply as the vehicle is not used for business purposes.

This ruling applies for the following periods:

1 April 20XX - 3 March 20XX

Relevant facts and circumstances

The following is a summary of the facts and circumstances that you provided.

You paid for the cost of repairs of an employee's car which was vandalised by a disgruntled former employee.

The vehicle is not used for business purposes.

Relevant legislative provisions

Fringe benefit tax assessment Act 1986 Section 24

Reasons for decision

Summary

The payment of the expenses incurred in repairing the damages to the employee's car will be an expense payment fringe benefit as it is not one of the benefits classified as being an exempt benefit in the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

The taxable value of the expense payment fringe benefit will not be reduced by the otherwise deductible rule as the vehicle is not used for business purposes.

Detailed reasoning

In considering the question asked in the ruling application it is necessary to initially determine whether the payment of the expenses incurred in repairing the car is a fringe benefit or an exempt benefit. If the payment is an exempt benefit it will not be necessary to consider the application of the otherwise deductible rule.

Is the payment an exempt benefit?

The FBTAA specifies certain benefits as being exempt benefits. The payment of the expenses incurred in repairing an employee's car where the damage is caused by a disgruntled employee is not one of the benefits specified to be an exempt benefit.

The calculation of the taxable value of an expense payment fringe benefit

In general terms, the taxable value of an expense payment fringe benefit that arises from the payment of an expense incurred by the employee in purchasing a good or service that is not provided as part of the ordinary course of the employer's business will be the amount of the payment. However, this value can be reduced if the employee could have claimed an income tax deduction for the expenditure if it had not been paid by the employer.

Does the otherwise deductible rule apply to the expense payment fringe benefit?

The otherwise deductible rule as it applies to expense payment fringe benefits is contained in section 24 of the FBTAA. Generally, it provides for the taxable value of the fringe benefit to be reduced by the deduction that the employee could have been claimed under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

However, special rules apply where the expenditure is a car expense. The deduction for a car expense is determined by the business use of the vehicle. That is, the amount of the deduction is determined by the extent of business use during the year. It is not determined by whether the need for a particular repair arose while the car was being used for business or private purposes.

Three methods are available for determining the otherwise deductible amount of a car expense that relates to an employee's car. They are:

• the log book method which uses the business use percentage determined using a log book and odometer records;

• a deemed percentage of 33.33% (provided the car has travelled a minimum of 5,000 business kilometres during the year;

• the lesser of 33.33% and the percentage calculated from the information provided by the employee in a declaration (the number of kilometres and number of business kilometres travelled by the car during the period of the year the car was used for business purposes.

In your situation none of these methods are applicable as the car was not used for business purposes. Therefore, as the car expense has not been incurred in undertaking business travel the otherwise deduction will not apply.

Although the repairs may have arisen as a result of the vehicle being targeted by a former employee, a deduction cannot be claimed for a car expense if the car has not been used for an income producing activity.