FBT Statutory Method vs Operating Cost Method. Which is best?
What is Fringe Benefit Tax?
The Australian Taxation Office (ATO) imposes Fringe Benefit Tax (also known as FBT), which is a type of corporate tax, on an employer who offers non-monetary compensation to their employees instead of cash wages. Currently, the Fringe Benefit Tax (FBT) rate is set at 47%, which is equivalent to the highest marginal income tax rate.
Although FBT is typically calculated based on the entire cost of the benefit provided, certain benefits are eligible for concessions or exemptions. One example of a benefit that qualifies for FBT concessions is a motor vehicle.
There are two ways you can calculate FBT: the Operating Cost Method and the FBT Statutory Method. If the Operating Cost Method isn't chosen or if the formula yields a more advantageous outcome, the Statutory Method is employed to calculate the car benefit FBT. To determine the FBT benefit value, the car's cost is multiplied by 20% and then distributed based on the number of days it was used for personal purposes. This approach is used when a log book is unavailable.
Using the statutory formula method to determine the value of a car fringe benefit can be advantageous because the FBT tax valuation is based on a fixed percentage (currently 20%) of the vehicle cost, which may not necessarily reflect the actual value of the car benefit.
The statutory formula method applies a fixed percentage of 20% to the base value of a car to determine the taxable value of the car fringe benefit, regardless of the distance traveled.
The statutory formula takes into account the following factors:
the cost of the motor vehicle
the date it was purchased
the number of days it was used for personal purposes
any contributions made by the employee (if applicable)
The Statutory Method Formula:
Taxable value = [Cost of the motor vehicle x statutory rate x the number of days of private use] ÷ 365 – employee contributions
Cost of the car (base value)
For the purpose of using the formula method, the cost of the motor vehicle includes dealer delivery charges, GST, and any customs duty paid, but excludes registration fees, stamp duty, and extended warranty expenses.
For more information on calculating the "Cost Price" for car fringe benefits, please refer to the Australian Tax Office's TR 2011/3 guidance.
It's important to note that after owning or leasing a car for four years, the cost (or base value) of the car is reduced by one third at the start of the FBT year.
Currently, the statutory rate is set at 20%. However, changes to the formula were made in 2011, which removed a previous benefit that was available for vehicles with high mileage during the FBT year.
Prior to 10 May 2011, the statutory rate was determined based on the distance traveled by the vehicle during the tax year. However, the percentages of the statutory rates were revised after 10 May 2011, to gradually phase in a fixed rate of 20% over a period of four years. Contracts that were in place before this date continued to receive the benefits of the previous, more favorable rates for high mileage.
Reducing FBT With Employee Contributions
If an employee's tax rate is lower than the current FBT rate (which is the same as the top marginal personal tax rate), and after adjusting for GST if applicable, then contributing towards an FBT benefit can be a cost-effective option, as it directly reduces the benefit's value on a dollar-for-dollar basis.
Employee contributions refer to after-tax payments made by the employee to the employer, which can also be accounted for through journal entry (as per MT 2050). Such contributions are considered taxable, and the employer must account for 1/11 of the amount as GST.
Employee contributions can also include a declaration (in an approved format) of fuel and oil expenses, as well as receipts for other car-related expenses. These payments are generally inclusive of GST and are not considered taxable supplies.
It's worth noting that if an employer provides a car to an employee (including lease-back arrangements), the employee cannot claim tax deductions for business use.
Operating Cost Method
The taxable value of the car fringe benefit is a percentage of the total costs of operating the car during the FBT year. The percentage varies with the extent of actual private use. The lower the actual private use, the lower the taxable value.
In order to calculate the taxable value of car fringe benefits using the Operating Cost method you need to use the following formula:
The Operating Cost Method Formula
[the total operating costs (including deemed costs for depreciation and interest) x the percentage of private use based on log books] - employee contributions
If you are having trouble determining the statutory percentage or feel that our information does not fully cover your circumstances, or if you are unsure how it applies to you, contact us.
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Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.