16 April 2012

Fringe Benefit Tax (FBT) is a Federal Government tax imposed on employers on the value of certain fringe benefits that have been provided to employees in respect of their employment. The FBT year runs from 1 April to the following 31 March. The current rate of FBT is 49% (2015/2016) and this is calculated on the grossed-up value of the benefit.

FBT Gross Up Rules

Under the FBT “gross-up” rule, the value of the benefit is increased, so that it is equivalent to the after-tax salary sacrificed amount of the benefit, plus FBT, at the top marginal rate of tax. This is intended to neutralise the tax benefit of receiving a salary benefit. However, motor vehicles remain an attractive component of a remuneration package because they are concessionally taxed for FBT purposes.

The selection of two different gross up rates is determined by whether the employer is entitled to GST input tax credits on vehicle acquisition or not. Type 1 gross up rate is currently 2.1463 and is applied to employees of organisations who are entitled to a GST credit. Type 2 gross up rate is currently 1.9608 and is applied to employees of organisations who are not entitled to a GST credit.

Once the FBT gross-up rate is determined for the employer and its employees, there are two methods available for calculating FBT for motor vehicles:

• Statutory formula method; or
• Operating cost method.

Statutory Method

The statutory method uses the FBT base value as the base for it’s calculation and makes no distinction between private and business use. It is therefore the more appropriate method to use where a vehicle has high private use as is typically the case with Novated Leases. The statutory formula values employer-provided cars for FBT purposes at a percentage of their initial cost. The actual percentages for discounting the car’s value vary according to the total kilometres travelled each year.

The Employee Contribution Method (ECM) is a way to help offset FBT liability. A reduction in FBT can easily be achieved by paying a portion of the running costs from post tax salary. The balance of costs (usually the majority) are still paid from pre tax income, this process provides significant tax savings for most people.  For every after tax dollar that is contributed from after tax dollars to the running cost of the vehicle, it will reduce the FBT liability on the vehicle by the same amount. After tax contributions are typically paid up to the Taxable Value of the vehicle.  As FBT is charged at the top tax bracket, any employee earning under the top taxation bracket should achieve a reduction in Novated Lease cost by electing to run with Employee Contribution Method.

Taking advantage of the ECM method is easy and does not involve any additional work from the driver. In other words, the driver is not required to transfer any ‘after tax’ money to sgfleet.  As long as an organisations payroll system can accommodate both a pre and post tax deduction, ECM method is likely to deliver significant savings.

Operating Cost Method

The taxable value of the car fringe benefit is a percentage of the total cost of operating the car during the FBT year. This percentage is based upon actual business/private usage of a car via maintenance of a car logbook.

The operating costs of a car include some actual costs and some deemed costs. These total operating costs are different to those that are relevant for income tax purposes.  Operating Cost Method FBT is typically only viable for vehicles that travel at least 60-70% business use.

Changes made to FBT laws in May 2011 have resulted in the statutory fraction being raised from 7% to 20% (phased in) for drivers travelling greater than 40,000 kilometres per annum. The result is that the Operating Cost Method is likely to become more popular in both the corporate lease and Novated Lease markets.

A log book must be kept for vehicles reported under the operating cost model, and employers must be able to report back to the tax office on both methods.   If the Operating Cost Method is used to calculate the taxable value of a car fringe benefit, the percentage of business use of the car must be calculated and records kept that substantiate the percentage of business use.

Because log book records are normally maintained for only 12 weeks, it is important to take care in estimating the percentage of business use of the car. The estimate must take into account the information in the log book records and the odometer records, as well as any variations in the pattern of business use throughout the year.

For more information on FBT, please contact sgfleet.