Edited version of private advice

Authorisation Number: 1051644616090

Date of advice: 19 March 2020

Ruling

Subject: Fringe benefits tax - exempt benefits

Question

Do the proposed modifications to vehicles owned by an employer, originally designed as passenger cars, result in the modified vehicles qualifying as exempt vehicles pursuant to subparagraphs 8(2)(a)(ii) and 47(6)(aa)(ii) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

This ruling applies for the following periods

Year ending 31 March 20XX

Year ending 31 March 20XX

Year ending 31 March 20XX

Year ending 31 March 20XX

The scheme commenced on

1 April 20XX

Relevant facts

An employer intends to purchase passenger vehicles to convert to panel vans. The employer does not have any of these vehicles in its fleet yet, and only future purchases of passenger vehicles will be subject to the conversion process.

The employer plans to convert these vehicles from 4-5 seat passenger vehicles into 2 seat vehicles.

The vehicles are therefore designed to carry a load of less than one tonne.

The reasons for these conversions include moving to low energy vehicles, smaller vehicles are easier to manoeuvre in busy streets and tight parking spots, and easier loading through rear and side doors.

Various modifications are made to the vehicles, and after these are completed the vehicles are issued with revised state government compliance plates that restrict the number of passengers in the car to two. After these modifications the vehicles can no longer be used as passenger vehicles.

The 'Employer Motor Vehicle Take Home Agreement' includes the following:

The type of vehicle allocated in this category will be an FBT Exempt vehicle, as defined by the Australian Tax Office for FBT purposes. Conditions of use for these vehicles will be restricted to ensure that FBT is not payable. Any FBT incurred due to failure to comply with usage requirements will be charged to the employee.

No private use other than to and from work is allowed.

The vehicle is to be available for operational use whenever required either during or outside business hours. The vehicle must be returned to the workplace during periods of leave.

"Direct travel" means the Employee's shortest route between home and work.

Under the 'Employee exempt car declaration', an employee must declare that:

There was no private use of the car during the year of tax and at a time when the car benefit was provided other than:

(i) work-related travel by me; and

(ii) other private use by me, being other use that was minor, infrequent and irregular.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 8(2)

Fringe Benefits Tax Assessment Act 1986 Subsection 47(6)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Do the proposed modifications to vehicles owned by an employer, originally designed as passenger cars, result in the modified vehicles qualifying as exempt vehicles pursuant to subparagraphs 8(2)(a)(ii) and 47(6)(aa)(ii) of the Fringe Benefits Tax Assessment Act 1986?

Exempt car benefits are addressed in subsection 8(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) as follows:

A car benefit provided in a year of tax in respect of the employment of a current employee is an exempt benefit in relation to the year of tax if:

(a) the car is:

(i) a taxi, panel van or utility truck, designed to carry a load of less than 1 tonne; or

(ii) any other road vehicle designed to carry a load of less than 1 tonne (other than a vehicle designed for the principal purpose of carrying passengers); and

(b) there was no private use of the car during the year of tax and at a time when the benefit was provided other than:

(i) work-related travel of the employee; and

(ii) other private use by the employee or an associate of the employee, being other use that was minor, infrequent and irregular.

Exempt benefits for a vehicle other than a car are addressed in subsection 47(6) of the FBTAA as follows:

Where:

(a) a residual benefit consisting of the provision or use of a motor vehicle is provided in a year of tax in respect of the employment of a current employee:

(aa) the motor vehicle is not:

(i) a taxi let on hire to the provider; or

(ii) a car, not being:

(A) a panel van or utility truck; or

(B) any other road vehicle designed to carry a load of less than 1 tonne (other than a vehicle designed for the principal purpose of carrying passengers); and

(b) there was no private use of the car during the year of tax and at a time when the benefit was provided other than:

(i) work-related travel of the employee; and

(ii) other private use by the employee or an associate of the employee, being other use that was minor, infrequent and irregular.

the benefit is an exempt benefit in relation to the year of tax.

The private use of a motor vehicle (either a 'car' for Fringe Benefits Tax (FBT) purposes or otherwise) is therefore exempt from FBT under subsection 8(2) or 47(6) of the FBTAA if all of the following conditions are satisfied:

·         the vehicle is a taxi, panel van, utility or other commercial vehicle (that is, one not designed principally to carry passengers)

·         the employee's private use of such a vehicle is limited to

-        travel between home and work

-        travel that is incidental to travel in the course of duties of employment

-        non-work related use that is minor, infrequent and irregular.

Guidance in relation to whether a vehicle (other than a dual cab or crew cab) is designed for the principal purpose of carrying passengers is provided in Taxation Determination TD 94/19 Fringe benefits tax: is the method in Taxation Ruling MT 2024 appropriate for determining whether a vehicle, other than a dual or crew cab, is 'designed for the principal purpose of carrying passengers' and thereby ineligible for the work-related use exemption available under subsection 8(2) of the Fringe Benefits Tax Assessment Act 1986? (TD 94/19).

Paragraph 2 of TD 94/19 states the following:

In determining the principal purpose for which any other vehicle was designed, regard should be had to factors including, but not limited to, the following:

·         the appearance and presentation of the vehicle

·         any relevant promotional literature

·         the emphasis in marketing

·         the vehicle's specifications

·         load capacity

·         passenger carrying capacity

Is the vehicle a 'car' and not a taxi, panel van or other commercial vehicle?

The term 'car' is defined in subsection 136(1) of the FBTAA as follows:

has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997

The term 'car' is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA) to mean:

a motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than 1 tonne and fewer than 9 passengers.

The vehicles in question are designed to carry a load of less than 1 tonne and fewer than 9 (4-5) passengers. The vehicles are therefore 'cars'.

With respect to subsections 8(2)(a)(i) and (ii) of the FBTAA, the vehicles in question are not a taxi, panel van or utility truck. The vehicles are other road vehicles designed to carry a load of less than one tonne, and for the principal purpose of carrying passengers.

To qualify for the exemption under subsection 8(2)(a)(ii) of the FBTAA the car needs to be modified to a vehicle not for the principal purpose of carrying passengers by alterations to the inherent design of the car which would be permanent, or at least not readily reversible.

Modified cars

Miscellaneous Taxation Ruling MT 2033 Fringe benefits tax: application of sub-section 8(2) exemption to modified cars (MT 2033) provides that a modified vehicle may also qualify as an exempt vehicle if the modification or alteration permanently affects the inherent design of the vehicle, and is not capable of being readily reversed, such that the design does not remain that of a passenger carrying vehicle.

5. Whether a car is of a kind to which the work-related use exemption is capable of applying depends on the vehicle's inherent design rather than the use to which the particular car is put. Thus, for example, the fact that the rear seat of a station wagon may be folded down and service equipment located in the extended rear section is not relevant for the purposes of the exemption, i.e. the car's design remains that of a passenger carrying vehicle.

6. Similarly, ordinary passenger cars of the kind commonly used as driver instruction cars are designed principally for the carriage of passengers and the fact that they may be fitted with dual controls and their use restricted to driver instruction does not alter the essential design of the car. This is established, broadly, by its designed seating capacity. Accordingly, passenger cars modified for use as driver instruction cars do not fall within the class of vehicles specified in sub-section 8(2) of the Act.

7. As to the second category of cases, a vehicle's design is generally established at the time of manufacture. In order to change that design it would be necessary that the modifications effect a permanent alteration to the vehicle.

8. A clear example of this would be the process in the production of hearses. Under this, a station wagon body is extended, the rear doors removed, flush panelling fitted and the compartment behind the driver's seat suitably modified.

9. Whether or not modifications to a car satisfy the test detailed in paragraph 7 needs to be determined on the facts of the particular case. However, as a general rule, the requirement that modifications effect a permanent change to the car would be satisfied where they are not capable of being readily reversed such that the car could, if required, be used alternatively as a passenger or non-passenger car on a regular basis. The fact that re-conversion may be made difficult by the bulk of any equipment or goods regularly stored in the rear section is not relevant for this purpose; rather, satisfaction of the requirement is to be found in the nature of the modifications themselves.

10. Simply removing the rear seat or bolting it down would not be sufficient for this purpose. However, if, as has been put to this Office, that were to be done in conjunction with the fixing of a rigid floor panel, the reinforcement of internal panels, the fixing of a protective screen behind the driver seat and the fixing of shelving, etc., to a service vehicle, it would be accepted that the modifications were such as to bring the vehicle within the ambit of sub-section 8(2). Of course, the modifications would need to extend throughout the entire rear area, including that previously devoted to the rear seat. Simply fixing shelving etc., to the area behind the rear seat location would not bring the vehicle within the ambit of sub-section 8(2).

The modifications that will be made to the cars to convert them from 4-5 passenger cars to 2 seat vehicles are:

• fit a permanent cargo barrier to the vehicle secured with numerous bolts to the frame of the car;
• fit and bolt down a one-piece carpeted floor to the entire rear area of the car;
• the rear seat back and support are totally removed, not just folded down; and
• remove and make rear seat belts inoperative.

Once the modifications are finished a new state government-issued compliance plate will be obtained and fitted to the cars. This compliance plate is for a 2-person vehicle, no passengers will be permitted to ride in the car other than in the front two seats. For more than two passengers to ride in the car, the modifications above need to be reversed and a new compliance plate obtained from the state government entity that issues compliance plates.

The modifications in question will be permanent, converting a vehicle designed principally to carry passengers, to a vehicle principally for the purpose of transporting work equipment with only one passenger. Independent confirmation of the modifications will be obtained by a state government issued Modification Plate verifying only two seats, one for the driver and one for a passenger.

The proposed modifications satisfy paragraphs 7 to 10 of MT 2033 as the modifications will be permanent, or not readily reversed. The cars could not alternate between passenger and non-passenger cars on a regular basis as this would require regular Modification Plates issued by the state Government.

However, in order for the car benefits to be exempt benefits, taxpayers will still need to satisfy the remaining conditions of section 8 of the FBTAA. In this respect, MT 2033 further states at paragraphs 11 and 12 that:

11. It should be noted that to qualify for the exemption the requirements of sub-section 8(2) must be satisfied at all times during an FBT year when the car benefit is provided, i.e., at all times when the car is used or available for the private use of the employee (or associate). Accordingly, the exemption will not apply in the year in which modifications are effected if, during that year, the unmodified car was used by the employee (or associate) for private purposes or was available for his or her private use. In determining for these purposes whether an unmodified car has been available for an employee's private use, particular regard should be had to sub-section 7(2) of the Act, the effect of which is that a car will be taken to be available for the private use of an employee on any day on which it is garaged at or near the employee's residence.

12. One final point should be noted in discussing eligibility for the exemption afforded by sub-section 8(2). As discussed in Ruling MT 2027, not all travel from an employee's home constitutes private travel. It follows that there will be cases where no FBT liability arises in respect of the use of a car garaged at an employee's home, notwithstanding its exclusion from the operation of sub-section 8(2).

The exemption will not apply in the Fringe Benefits Tax (FBT) year in which the modifications take place if, during that year, the unmodified car was used by an employee (or associate) for private purposes or was available for an employee's private use. The exemption will apply in subsequent FBT years when the modifications are in place for the whole FBT year.

The proposed modifications to the cars are sufficient to satisfy the requirements of sub-paragraph 8(2)(a)(ii) of the FBTAA such that each vehicle will qualify as a 'car' being a road vehicle designed to carry a load of less than one tonne (other than a vehicle designed for the principal purpose of carrying passengers).

Subsection 47(6) of the FBTAA

After modification, the vehicles will carry a load of less than one tonne, and will not be designed for the principal purpose of carrying passengers.

Although not directly addressed in MT 2033, the same principles are considered as applying to modified vehicles under sub-subparagraph 47(6)(aa)(ii)(B) of the FBTAA as they do under subparagraph 8(2)(a)(ii) of the FBTAA. Consequently, the modified vehicles qualify as exempt vehicles pursuant to sub-subparagraph 47(6)(aa)(ii)(B) of the FBTAA.

Private use of vehicles

The private use of a motor vehicle (either a 'car' for FBT purposes or otherwise) is exempt from FBT under subsection 8(2) or 47(6) of the FBTAA if the employee's private use of such a vehicle is limited to

·         travel between home and work

·         travel that is incidental to travel in the course of duties of employment

·         non-work related use that is minor, infrequent and irregular.

The 'Employer Motor Vehicle Take Home Agreement' sets out the conditions of use of employer vehicles, and that no private use other than to and from work is allowed, with such travel being the shortest route between home and work. If an employee does not stay within the restrictions, and the employer is liable for FBT, the employee will be charged for the FBT.

The 'Employee exempt car declaration' requires an employee to declare that there was no private use of the car during the year of tax and at a time when the car benefit was provided other than: (i) work-related travel; and

(ii) other private use, being other use that was minor, infrequent and irregular.

It is accepted that the employer has guidelines and procedures in place to ensure that the private use of the modified vehicles will be restricted to obtain the FBT exemption.

Subparagraphs 8(2)(b) and 47(6)(b) are satisfied.

Conclusion

The modified vehicles will satisfy the exemptions in both subparagraph 8(2)(a)(ii) and sub-subparagraph 47(6)(aa)(ii)(B) of the FBTAA, as well as the private use subparagraphs 8(2)(b) and 47(6)(b) of the FBTAA.

The modified vehicles will be exempt from FBT, but only in an FBT year where the private use is restricted as above. If the unmodified vehicle was used by an employee (or associate) for private purposes or was available for his or her private use during the FBT year, the exemption will not apply for that FBT year.