Recent taxation changes have effectively reduced the tax deductions on one tonne utes.
A ute is not a car
If you keep your company car garaged at the family home it is deemed to being used privately. So employer will incur fringe benefits tax on the provision of the car – even if John uses the car a lot for his job.
John is given a Mazda 3 by his employer to use. As John is able to take the car home every night his employer is required to pay fringe benefits tax on the car.
However the taxation law contains a provision that a one tonne ute, panel van (that can carry a tonne), or a bus (more than 9 passengers) is not a “car”. So the law applying to the taxation of one tonne utes was quite friendly.
John is given a Holden Rodeo tray top by his employer. As John is able to take the car home every night his employer can potentially avoid fringe benefits tax.
In particular the travel from home to work and back is considered a tax deductible trip. This compares to others cars where it is not tax deductible.
The FBT cost for the Mazda 3 (assuming $27,000) will be an additional $5,400 a year in fringe benefits tax.
So a ute is very tax effective.
The current situation
Most Perth accountants have taken the view that a one-tonne ute is wholly tax deductible. However that is not the case.
The employer must still take all reasonable steps to limit any private use by the employee and actively monitor the private use. And for most family businesses this is not difficult – but a failure to properly investigate and document the process could potentially mean that the tax deductions for the one-tonne ute are at risk.
And with the continued trend for luxury dual cab one-tonne utes, or trucks that are driven like sedans, it is increasingly difficult to argue an assumption that these cars are only for business.
What is minor, infrequent and irregular?
Fringe benefits tax law contains a provision at 8(2) and 47(6) that all travel is for work purposes if the private use is “minor, infrequent and irregular”.
The concept of “minor, infrequent and irregular” was dependent on the facts of each case. If a person drove say, 65,000km a year in a car, and the sole travel is a 400km round trip to attend a funeral, minor?
The Tax Office have not given us clear indications on the use of the words. However in a different area of law (TR 2007/12) a tax advisor could take into account the follow five criteria
- How infrequency and irregularity where the benefits are provided?
- What is the current value of the minor benefits?
- What is the value of the other benefits provided?
- How difficult is it to track the minor benefits?
- Is the benefit a reward or done under a salary sacrifice?
Applying these criteria to a specific client was difficult but did allow a case by case review. But it was considered by many that tracking the private use was difficult.
So what has changed?
The Tax Office has introduced an objective test in PCG 2017/D4 to see if the ute is being used privately (and subject to fringe benefits tax).
Starting now a ute will incur fringe benefits tax if:
- The total amount of private use for the ute exceeded 750km; or
- A single private trip was more than 200km; or
- The travel between home and work did not include a diversion that was more than 2km.
The technical approach of this determination is that it simply clarified the law. However practically the issue relates to how a family business employer can prove the private use of a person is less than say, 750km. And for some business owners they will have to revisit their concept of minor travel.
The most obvious answer is that a log book will satisfy this requirement. And while an employer will be able to do alternatives to a log book active steps must be taken to stop the liability happening – often for a trival amount.
John is provided with a Nissan Navara Dual Cab one tonne ute. The operating costs of the ute, including depreciation, interest, repairs, licensing, and fuel totals $34,000.
John keeps details of his private use of the car. The total private use is 915km a year of the 26,000km travelled.
The employer is now required to prepare a fringe benefits tax return, and show the value of the benefit in John’s annual PAYGW statement.
Further, if the employer is paying payroll tax the value of the private use is now included in the payroll tax returns – to effectively deal with the tax on 3.5% of the 26,000km.
How to plan in advance
We have procedures were both the employer and employee can show that they have monitored and dealt with the new changes. These are available by contacting us directly and they are complimentary.
In some instances a liability might arise. And we also have some tax strategies that a family business might be able use and eliminate the need for expensive and cumbersome forms.