When reflecting on an organisation’s FBT compliance, it is useful to consider any compliance strategies that may make compliance simpler and possibly achieve costs savings for future FBT years.
When it comes to calculating an employer’s FBT obligation for car benefits, there are two methods available, the statutory method and the operating cost method. Logbook records are required to determine ‘business use’ percentage under the operating cost method. For employers with a fleet of cars (and where inherently a significant business use percentage is likely), a perennial problem is obtaining valid logbooks.
Without a valid logbook, employers need to use the statutory method to value car benefits which often results in a much higher FBT liability.
To assist employers deal with this problem, in October 2016, the ATO issued Practice Compliance Guideline PCG 2016/10 Fleet Cars: simplified approach for calculating car fringe benefits. PCG 2016/10 allows employers to apply a simplified approach (‘the simplified approach’) in valuing car fringe benefits using the operating cost method without the need to obtain 100% of logbooks providing certain conditions are met.
Anecdotally we are not aware of a high take up of the simplified approach permitted by PCG 2016/10. This is a little surprising as the problem it is meant to remedy is quite common and prima facie the approach could seemingly deliver a better FBT outcome for many employers. An employer can also opt to use the approach (if eligble) in one year but not the next so flexibility exists.
When PCG 2016/10 was issued, we published an FBT Article ‘Simplified approach for calculating FBT for fleet cars‘ (‘the 2016 article’) explaining the application of the simplified approach. The article identified certain issues requiring further clarification.
Since then, the ATO has published QC 52336 PCG 2016/10 FAQs containing answers to frequently asked questions about the application of PCG 2016/10 including many of the issues raised in our 2016 article.
In this article, we explain the benefits and potential issues that arise in applying the simplified approach outlined in PCG 2016/10 including practical matters covered in the PCG 2016/10 FAQs.
We hope this article will be useful for employers when considering whether the simplified approach is available/appropriate to their circumstances.
PCG 2016/10 provides that an eligible employer has the option to apply the simplified approach to value the car benefits for the entire fleet of qualifying cars if the following criteria are met.
A qualifying car
A ‘tool of trade’ car is defined in PCG 2016/10 as a car provided by an employer to their employee to enable the employee to carry out duties that involve extensive business use of the car. An example is where an employer provides the car to their sales representative to enable them to visit multiple customers each day, the car would qualify as a ‘tool of trade’ car.
A car provided by an employer to an employee mainly for private use purposes (such as trips between home and work) or as part of a salary packaging arrangement would not qualify as a ‘tool of trade’ car.
The PCG 2016/10 FAQs clarify that where the employer provides the employee with a list of cars (specific makes and models) to choose from, the car is considered chosen by the employer. There is no maximum number of cars the employer can put on the list.
When considering whether to apply PCG 2010/6, an employer needs to be able to clearly identify what is the fleet of tool of trade cars. If there is any doubt as to whether particular cars are tool of trade cars or are part of the fleet of tool of trade cars, advice should be sought to clarify the position as it could impact any perceived advantages of applying the simplified approach.
To be eligible to apply the simplified approach, employer must have:
An employer is required to have a fleet of 20 or more qualifying cars throughout an FBT year to apply the simplified approach. The PCG 2016/10 FAQs provide that where the number of qualifying cars falls below 20 during an FBT year, the employer must show that an attempt is made to replace cars/meet the 20 cars limit within a reasonable timeframe if they want to apply the simplified approach. If the employer did not replace the car within a reasonable timeframe, they won’t be able to apply the simplified approach even if they have 20 or more qualifying cars at the end of the FBT year.
An example adopted from FAQs is where the employer held 20 qualifying cars at the start of the FBT year, and one of the qualifying cars was destroyed during the FBT year, the employer could continue to apply the simplified approach if before the end of the FBT year:
‘A reasonable timeframe’ is not defined in the FAQs. It states that individual facts and circumstances will need to be taken into account.
In determining whether at least 75% of logbooks are held, simply divide the number of qualifying cars with a valid logbook by the total number of qualifying cars. Note that the employer must include all qualifying cars in the calculation.
Where the 75% test is met, the average business use is determined based on the logbooks held. The average business use is then used instead of the actual business use for each car to determine FBT payable for the fleet. The average business use is also used for cars where no logbook is held.
An employer is still required to keep odometer readings at the start and end of the FBT year for the entire fleet of qualifying cars for each FBT year to apply the simplified approach.
An issue raised in our 2016 article involved the requirement that employees are mandated to keep a logbook for all the cars in the fleet and how that applies for logbooks prepared in earlier years (prior to applying PCG 2016/10).
The FAQs confirm that the logbooks don’t have to be prepared in the same year for all the qualifying cars in the fleet. An employer can use valid logbooks (completed within the last 5 FBT years) to determine if it meets the 75% test. A logbook prepared in a previous year must however remain representative of the business use profile in the current year for it to remain valid. If an employer decided to apply the simplified approach in the 2020/21 FBT year, all valid logbooks completed within the last 5 FBT years can be included to determine whether the 75% is met. When the employee’s profile has changed resulting in the logbook business use percentage no longer being representative of the business use of the car, then a new logbook will be needed.
Under s10(1) of the FBT Act, an employer may elect to value the car fringe benefits in relation a particular car using the operating cost method in an FBT year. The ATO has said that an employer can choose whichever method (between the statutory method and the operating cost method) that yields the lowest taxable value, regardless of which method was used in a previous year.
One of the components of the operating cost method is the business use percentage which should be evidenced by a valid logbook. Where the operating cost method is elected, the simplified approach outlined in PCG 2016/10 provides an optional approach to working out the business use percentage of the operating cost method.
One of the reasons that an eligible employer may not want to apply the simplified approach is where the statutory method produces a lower taxable value of car benefits for cars without a valid logbook. In those circumstances, the employer can elect to value particular cars with valid logbooks using the operating cost method under s10(1) of the FBT Act and apply the statutory method for the rest of the cars. The impact on employee Reportable Fringe Benefits (see below) may also be a consideration.
Where the simplified approach is adopted, the reportable fringe benefit (RFB) amounts for individual employees are calculated using the same average business use percentage as the one used to determine the employer’s FBT liability.
Employees with lower actual business use percentage than the average business use percentage would get an advantage of a lower RFB amount. Employees with actual business use percentage higher than the average business use percentage would be worse off by having a higher RFB amount.
Whilst not part of the employee’s assessable income, the reportable fringe benefits amount is taken into account in determining a number of income tested government benefits and concessions.
The employer will need to make their employees aware of the potential impact to their individual circumstances.
Where the employer also provides cars other than qualifying cars it can choose between the statutory method or the operating cost method where a valid logbook is kept when determining FBT payable. In the case of operating cost method, the business use percentage evidenced by the logbook for that car is used, rather than the average business use percentage applicable to the qualifying cars.
In summary, the simplified approach can bring benefits of administrative simplicity and tax savings to employers.
In the absence of the simplified approach, the employer will need to apply statutory method to all the qualifying cars without a valid logbook. Given qualifying cars may inherently have a high business use percentage, the potential tax saving can be substantial.
For employers that provide qualifying cars and have difficulties in obtaining 100% logbooks, it is worth considering applying the simplified approach by reviewing the potential savings, ensuring a mandatory logbook policy is in place and planning to ensure logbooks are held for at least 75% of qualifying cars in the FBT year.
As mentioned above, employers need to be aware of the impact on employees’ RFB amounts – best to avoid any unhappy faces.
This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.