Providing an employee with a hire car raises the questions of whether a benefit is provided and if so how to determine its value. In response to a reader’s request we highlight the FBT ramifications of providing hire cars to employees.
Due to a range of circumstances, employers may have provided a hire car to an employee during the FBT year. This raises the question as to whether a benefit has been provided. In this article we will look at the various types of benefits that may arise from such provision, the various methods available to an employer in valuing those benefits and outline some possible exemptions that may apply.
Is there a ‘car benefit’?
As the employee has been provided with a car a logical first step is to determine whether a car benefit has been provided. For a car benefit to be provided the employer must provide a car to the employee. Whilst the notion that a car is not a ‘car’ may seem bizarre, under the FBT Act the term ‘car’ is given the specific definition of ‘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’. Therefore, where the hire car does not meet this definition i.e. a utility vehicle with a carry capacity of more than 1 tonne, it will not be a car benefit.
Another requirement for the provision of a car to be a car benefit is that the car is held by the employer. In relation to hire-cars the most important carve out for what constitutes a car being held by an employer is a car that is hired on an hourly, daily, weekly or other short-term basis will generally not be considered to be held by the employer. This raises the question of what period of time constitutes a short-term basis?
The ATO has previously stated, as general rule of thumb, that where a car is hired for less than 12 weeks it will be considered to be hired on a short-term basis. However, it is important to note that where the car has been hired under successive agreements that result in a substantial continuity of the hiring of the car it would not be considered to be hired on a short-term basis.
FBT Free Kick if not a ‘car benefit’?
If the provision of a hire car to an employee does not constitute a car benefit, then you may be asking yourself the question whether this means the car is not subject to FBT. The answer is ‘no’, subject of course to any exemptions and reductions. The provision of the hire car will either be an expense payment benefit or a residual benefit.
The provision of a short-term hire car will be considered an expense payment benefit where the employee has directly incurred the expense relating to the hire-car and the employer either pays the provider on behalf of the employee or reimburses the employee for the costs. Where the employer directly hires the car, the short-term hire-car is not an expense payment benefit but rather a residual benefit.
Valuing Benefits and Reductions
Upon identifying that a benefit has been provided the next step is to determine the taxable value of the benefit. The valuation method to be used is dependent upon whether the benefit is a car benefit, an expense payment benefit or a residual benefit.
Value of ‘car benefit’
If the benefit is a car benefit, there are two options that can be used to value the benefit, the statutory formula method and the cost basis (logbook) method. For the cost basis method, a 12-week logbook and odometer records are required otherwise the value of the car benefit will not be reduced by the employee’s business use. Under both methods the value of the benefit can be reduced by after tax contributions made by the employee (‘recipient’s payment’), which includes employees directly paying for the operating costs of the car such as fuel and maintenance.
Value of ‘expense payment benefit’ or ‘residual benefit’
Where the benefit provided is either an expense payment benefit or a residual benefit, the value of the benefit is determined by the cost of providing the benefit – i.e. the rental price for the vehicle.
The value of the benefit under these two methods is reduced by the amount that would otherwise be deductible to the employee if those costs were incurred directly by the employee and not reimbursed. In addition, the value of the benefit is also reduced by any recipient payment made by the employee. The recipient payment for an expense payment benefit or residual benefit reduces the value of the benefit before the reduction relating to the amount that is otherwise deductible. Furthermore, whilst the payment of fuel and other running costs by the employee are considered recipient payments where a car benefit has been provided, this treatment does not extend to expense payment benefits and residual benefits.
To reduce the value of the benefit by the amount that is otherwise deductible the employee must provide the employer with a signed declaration of the percentage of the taxable use of the car. To determining the taxable use percentage of the car the ATO accepts the use of logbooks. The ATO have also stated that they will accept any other reasonable method.
In cases where the taxable use percentage of the car is high, the ATO also accepts the cents per kilometres method in determining the value of the benefit. However, this method is only available where a residual benefit is being provided – see Miscellaneous Taxation Ruling MT 2034. It cannot be used in respect of an expense payment benefit car hire arrangement.
The rate applicable to an FBT year can be found on the ATO website. Where an employee has made a recipient payment in respect of a benefit that has been valued using the cents per km method the recipient contribution must be apportioned across all kilometres travelled and not merely applied directly against the private use kilometres.
For each different type of benefit there are potential exemptions which may be applied by the employer to reduce the taxable value. The exemptions most relevant to hire-cars are briefly set out below.
Where a car benefit is provided and the car is a ‘workhorse’ vehicle (e.g. a utility vehicle that has a carrying capacity of less than 1 tonne) the benefit will be an exempt benefit where car is used to travel between home and a workplace and the only other private use of the vehicle minor, infrequent and irregular.
Where a car that does not meet the FBT definition of a ‘car’ is provided to an employee in the form of a residual benefit, an exemption will similarly apply if the only private use of the vehicle is travel between home and a work place and other private travel that is minor, infrequent and irregular.
Where the ‘workhorse’ exemptions above are unavailable, for a benefit that is an expense payment benefit or a residual benefit, the employer may make a ‘no private use declaration’ in respect of all benefits of that category that are provided in an FBT year in respect of all employees. If such a declaration is made all of the benefits of that category will be exempt benefits.
To be eligible to make a declaration for expense payment benefits, the reimbursements/expenses paid by the employer to or on behalf of all its employees must only be for the business use portion of the expenses. Similarly, to be eligible to make a declaration in relation to the residual benefits the employer must have a consistently enforced policy only allowing business use for any use of property (not just cars) by its employees that gives rise to a residual benefit.
Where the value of the benefit provided (after reductions, exemptions and recipient contributions) is less than $300 the minor benefit exemption may apply. However, for this exemption to apply the provision of the benefit must be minor and infrequent. Where a car is provided other than on a very short-term basis it is unlikely that it will be considered infrequent, in which case the minor benefit exemption will not apply.
Lastly, it should be noted that where a car benefit is provided the payment of running costs of the car will be exempt benefits. This exemption, however, is solely in relation to car benefits and does not extend to the provision of cars that are expense payment benefits or residual benefits. In both of those cases, the payment or reimbursement of running costs will either be an expense payment benefit, a property benefit or a residual benefit depending on the circumstances.
This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. It is not intended to be, nor should it be relied upon as, a substitute for professional advice. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use.