Edited version of private advice

Authorisation Number: 1052015650661

Date of advice:23 May 2023

Ruling

Subject: Income tax - fringe benefits tax

Question 1

Is the taxpayer required to apply the car limit under section 40-230 of the Income Tax Assessment Act 1997 (ITAA 1997) to a vehicle that has been modified to carry a load of more than one tonne?

Answer

No

Question 2

Is the vehicle eligible for the fringe benefit exemption available under subsection 47(6) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

This ruling applies for the following periods:

Fringe benefits tax (FBT) year ended 31 March 2022

Fringe benefits tax (FBT) year ended 31 March 2023

Fringe benefits tax (FBT) year ended 31 March 2024

Fringe benefits tax (FBT) year ended 31 March 2025

Income tax year ended 30 June 2021

Income tax year ended 30 June 2022

Income tax year ended 30 June 2023

The scheme commences on:

XX June 20XX

Relevant facts and circumstances

This private ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The taxpayer is a business branch of specialised training company, offering programs specifically for school-based cohorts and apprenticeships.

The taxpayer employs registered teachers to carry out the training programs, who are equipped with the knowledge and experience of the qualifications being trained and the operating systems within schools.

Each training program the taxpayer deliver comes equipped with the learning devices, tools and equipment required throughout the course. The taxpayer aims to remove the barriers of insufficient resources and provide each student the opportunity to learn through using industry standard equipment that is maintained, cleaned and transported to the school at the beginning of each lesson.

The taxpayer purchased a brand-new vehicle in April 2021 for $XXX.

Pre-purchase alterations

When the taxpayer ordered the new vehicle from the dealer, they also requested the vehicle's payload capacity be increased to enable work-related heavy materials and equipment to be carried and to tow a heavy equipment trailer.

The dealer the taxpayer purchased the vehicle from arranged for these payload capacity alterations to take place prior to the vehicle's delivery to the taxpayer. The additional cost of these alterations were paid by the taxpayer directly to the dealer.

Prior to the payload capacity alterations taking place, the vehicle had a payload capacity of 610kg. Following the payload capacity alterations, the vehicle had a payload capacity of 1,510kg (or 1.51 tonnes).

In accordance with registration requirements, a second-stage manufacturing compliance plate was attached to the vehicle after the payload capacity alterations were carried out. The original compliance plate remained attached to the vehicle.

Post-purchase alterations

Once the taxpayer took delivery of and held the vehicle, they arranged for the third row of seats to be removed from the vehicle and replaced with a set of drawers to enable tools and equipment to be stored therein. A third compliance plate was attached to the vehicle to re-rate it from an 8-seater to a 5-seater.

The vehicle is provided to one of the taxpayers' employees, who is also the director.

The vehicle is primarily used by this employee to travel between his home and work and transporting tools and equipment. There is no private use of the vehicle other than work-related travel and other minor, infrequent and irregular private use. A residual benefit declaration has been signed by the employee in his capacity as an employee to confirm this.

Relevant legislative provisions

Section 995-1 of the ITAA 1997

Section 40-230 of the ITAA 1997

Subsection 47(6) of the FBTAA 1986

Section 136(1) of the FBTAA 1986

Reasons for decision

Question One

Is the taxpayer required to apply the car limit under section 40-230 of the ITAA 1997 to a vehicle that has been modified to carry a load of more than one tonne?

Summary

No, the taxpayer is not required to apply the car limit under section 40-230 of the ITAA 1997 to a vehicle that has been modified to carry a load of more than one tonne.

Detailed reasoning

Subdivision 40-C of the ITAA 1997 states the cost of a depreciating asset has two elements.

Section 40-180 of the ITAA 1997 states the first element of the cost is at the time you start to hold the asset and the cost is worked out, unless the provision states otherwise, as the amount taken you have paid to hold the asset, such as the acquisition price.

The second element of the cost is generally worked out after you start to hold the depreciating asset, as per section 40-190 of the ITAA 1997. The consideration provided by you to bring the asset to its present condition and location from time to time for example modifications, alterations or improvements to the asset. The second element may only apply to some assets.

In respect of cars, the law may limit the cost that can be claimed as a deduction for tax purposes.

A "car" is defined in section 995-1(1) of ITAA 1997 to mean a "motor vehicle" (except a motorcycle or similar vehicle) designed to carry a load of less than one tonne and fewer than 9 passengers. The car limit applies to both new and second-hand cars. Station wagons and 4-wheel drives are also treated as cars unless they specifically fall outside the definition of "car" or "motor vehicle".

Section 995-1(1) of the ITAA 1997 defines "motor vehicle" to mean any motor-powered road vehicle (including a 4-wheel drive vehicle).

Subsection 40-230(1) of the ITAA 1997 outlines the "car limit" as:

The first element of the cost of a car designed mainly for carrying passengers (after applying 40-225 and Subdivision 27-B) is reduced to the car limit for the financial year in which you started to hold it if its cost exceeds that limit.

The car limit for the 2021-22 financial year is $60,733.

In the taxpayer's circumstances, they acquired the vehicle and arranged with the dealer for the vehicle to be altered to increase its payload capacity to more than one tonne before they held it. The alteration costs to increase the vehicle's payload capacity were added to the purchase price of the vehicle and paid directly to the dealer.

The alterations that took place prior to delivery, results in the vehicle not meeting the 995-1(1) legislative definition of 'car' because its payload capacity exceeded one tonne at the time of purchase.

The cost of the purchase of the vehicle and the alteration made its payload capacity before holding the vehicle in the 2021-22 financial year form the first element of the depreciating asset (the vehicle). This does not need to be reduced to the car limit because the vehicle is not a 'car' according to the legislative definition.

However, the removal of the third row of seats and replacing the area with drawers was completed after the taxpayer held the vehicle, so these are considered second element costs.

Therefore, the taxpayer is entitled to account for the full cost of the purchase of the vehicle including the payload capacity modifications made as a depreciable asset and claim a deduction for depreciation for income tax purposes.

Question Two

Is the vehicle eligible for the fringe benefit exemption available under subsection 47(6) of the FBTAA?

Summary

Yes, the vehicle is eligible for the fringe benefit exemption available under subsection 47(6) of the FBTAA but only where the employee's private use is limited to work-related travel and to other private use that is minor, infrequent and irregular.

Detailed reasoning

A fringe benefit generally arises where an employer makes a vehicle, they hold available for the private use of an employee.

The type of benefit being provided is either a car fringe benefit (when the vehicle being provided meets the legislative definition of 'car') or a residual fringe benefit (when the vehicle being provided does not meet the definition of 'car').

However, a fringe benefit exemption is available for certain types of vehicles when the employee's private use is limited to work-related travel and to other private use that is 'minor, infrequent and irregular'.

The legislative definition of 'car' for FBT purposes is the same as the income tax definition (see section 136(1) of the FBTAA).

Therefore, as outlined in the response to Question 1, the vehicle that is being provided to the employee in this situation does not meet the definition of 'car' because at the time of its purchase the payload capacity exceeded one tonne and the cost of carrying out alterations to increase the payload capacity was paid directly to the dealer prior to ownership.

Therefore, any private use of this vehicle would be treated as a residual fringe benefit pursuant to section 45 of FBTAA, unless an exemption applies.

Subsection 47(6) of the FBTAA provides, where:

1. 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 vehicle used for taxi travel (other than a limousine) 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

2. there was no private use of the motor vehicle 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 of the motor vehicle 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.

In the taxpayer's situation, a residual benefit consisting of the provision or use of a motor vehicle is being provided in respect of the employment of a current employee and the motor vehicle that is being provided to that employee is not used for taxi travel or is a car, therefore the first requirement of the subsection 47(6) exemption is satisfied.

The ATO's view on 'minor, infrequent and irregular' use is contained paragraphs 6(f) and 6(g) of Practical Compliance Guideline PCG 2018/3.

This guideline states that in order for private use to be considered minor, infrequent and irregular, employees:

•         can only use the vehicle to travel between their home and their place of work and any diversion cannot add more than two kilometres to the ordinary length of that trip; and

•         for journeys undertaken for a wholly private purpose (other than travel between home and place of work), the employee cannot use the vehicle:

o   to travel more than 1,000 kilometres in total during the FBT year; or

o   for a return journey that exceeds 200 kilometres during the FBT year.

In the taxpayer's situation, they stated there is no private use of the vehicle by the employee other than work-related travel and other minor, infrequent and irregular private use and a residual benefit declaration has been signed by the employee to confirm this. However, they haven't confirmed whether the employee diverts more than two kilometres from their ordinary home to work travel, travels more than 1,000 kms in total for private purposes during the FBT year or makes a private return journey that exceeds 200 kilometres during the FBT.

Therefore, the second requirement of the subsection 47(6) exemption is satisfied only when the employee meets the 'minor, infrequent and irregular' requirements that are outlined in PCG 2018/3 for the full FBT year.

Where both requirements (subsections 47(6)1 and 47(6)2)) are satisfied for the entire FBT year, they are eligible for the subsection 47(6) FBT exemption.

Record keeping reminder

The taxpayer is reminded that they must keep records about employee's use of the vehicle that demonstrate that the private use of the vehicle is 'minor, infrequent and irregular' and they must be able to demonstrate that the employee's use of the vehicle at all times meets the limited private use conditions.

For example, the taxpayer could require the employee to keep a logbook indicating which trips are business-related and which trips are private, have a policy in place that limits private use of the vehicle, ensure employee compliance of this policy and regularly compare the opening and closing odometer readings of the vehicle with the total distance the taxpayer expects the employee to travel between home and work.

If an employee's use of the eligible vehicle doesn't meet the conditions for limited private use, it is a residual fringe benefit and the taxpayer will need to work out the taxable value of the private use of the vehicle, calculate how much FBT to pay, lodge their FBT return, pay the FBT amount and check if they should report the fringe benefit through Single Touch Payroll (or on their employee's payment summary).

The taxpayer will need to know the amount of private use versus business use. The taxpayer doesn't have to keep a logbook, but if they have one it will be easier to work out the extent of private use of the vehicle. If the taxpayer doesn't have a logbook, they can make a reasonable estimate (for example, if an employee drives the vehicle between home and work, they could determine this component of private use by multiplying the number of journeys during the year by the distance between the employee's home and place of employment).