My ‘ute’ is FBT exempt right? Wrong.
Well.. not necessarily anyway. For some time now, small business owners have been spruiked to that they should buy a ‘commercial vehicle’ such as a ute, including many dual cab utes, because it will mean they can claim 100% of it as a tax deduction regardless of their private usage, without having to worry about Fringe Benefit Tax (FBT) as these vehicles are exempt from FBT.
Whilst this isn’t entirely accurate, we believe many business owners have acted on such information without being aware of exactly what is required for a vehicle to be considered as exempt from FBT. As a result, many businesses are likely now sitting on sleeping time-bombs.
It’s only in the below circumstances that a vehicle will be considered as exempt from FBT. The ATO provides:
“The private use of a motor vehicle is exempt from FBT if all of the following conditions are satisfied:
- the vehicle is a panel van, utility (ute) 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 (eg: occasional use of the vehicle to remove domestic rubbish)”.
Difficulties with enforcing the rules
Over time, spruikers have taken a broad interpretation of the above circumstances, and whilst the ATO continues to conduct FBT audits, we believe to date they have been somewhat restrained with targeting FBT exempt vehicles due to the lack of clarity and the cost v benefit of reviewing situations on a case by case basis per taxpayer.
Beware – This is about to change
We believe the ATO are setting themselves up to be able to perform bulk compliance blitzes on utes and other commercial vehicles, to ensure they actually do qualify for FBT exempt status. Those found not qualifying, will lose their FBT exempt status which could cost thousands of dollars in additional tax. This is due to the recent ATO Practical Compliance Guideline PCG 2018/3 which clarifies their interpretation of ‘private use’.
The guideline applies retrospectively from 1 April 2018 and clarifies that private usage in excess of:
- 2 kilometres added to a trip between home and work;
- 1000 kilometres in total for an FBT year (1 April to 31 March), and where no single return journey exceeds 200 kilometres
will be considered as not qualifying as exempt private usage.
What does that mean?
If your private usage falls outside of the above, it will mean the ATO will be unlikely to consider your vehicle as an FBT exempt vehicle meaning it should be treated the same as a car for FBT purposes. Arguably one of the biggest impacts from this will be that travel between home and work will be considered as personal and no longer exempt from FBT.
…but everyone does this. What’s changed?
Two words ‘Big Data’. Just because many have been doing it, that doesn’t make it right. Now with advances in technology, the amount of information available to the ATO by way of traffic monitoring cameras etc. means they will soon have the ability to reasonably determine how many kilometres they believe taxpayers have travelled for work-related purposes. The ATO can then use this data to initiate targeted audits and compliance checks.
I provide utes to my employees and I know they use them for private use…
If you want to maintain FBT exempt status on your commercial vehicles, it is important you take action.
The new ATO guidelines are designed to help you when:
- you allow employees limited private use of an eligible vehicle that:
- adds no more than 2 kilometres to their trip between home and work
- doesn’t exceed, 1,000 kilometres in total for the FBT year, and where any one return journey doesn’t exceed 200 kilometres
- you provide the vehicle to the employees for business use to do their job and it isn’t part of their salary package arrangement; and
- the value of the vehicle is less than the luxury car tax threshold at the time the vehicle was acquired
I don’t want to be penalised. What can I do to ensure my employees don’t exceed the guidelines?
To maximise the chances of maintaining FBT exempt status for your commercial vehicles, we recommend:
- Put a policy in place that limits the private use of the vehicle; and
- Obtain annual assurance from your employees stating their use is limited to that outlined above.
We recommend ensuring the policy is clearly documented and communicated to all as well as ensuring there is a clear understanding that employees will need to provide a signed statement assuring the private usage is limited to that described.
The ATO has stated that employers do not need to keep records on the usage of work vehicles if they continue to rely on the guidelines, however, we recommend employers should ensure copies of the communication, including the policy and annual employee assurance declarations, are maintained in the personnel files of the employees.
If you’re unsure about your new obligations in relation to these new guidelines, please don’t hesitate to contact us to speak with one of our FBT specialists on how our recommendations can help safeguard you and your business.