Fringe Benefits Tax (FBT) Changes

As speculated, the Government announced changes to the "statutory formula" method for calculating Fringe Benefits Tax (FBT) on car fringe benefits. The changes will replace the current four-tiered statutory rate system with a flat statutory rate of 20 per cent that will apply regardless of the kilometres travelled.

The new rate applies to new vehicle contracts entered into after 7.30pm (AEST) on 10 May 2011, and but will be phased in over four years in the manner set out in the table below.

Changes to car fringe benefit rules

Distance travelled during the FBT year (1 April – 31 March) Statutory rate (multiplied by the cost of the car to determine a person's car fringe benefit)
Existing contracts New contracts entered into after 7:30pm (AEST) on 10 May 2011
From 10 May 2011 From 1 April 2012 From 1 April 2013 From 1 April 2014
0 – 15,000 km 0.26 0.20 0.20 0.20 0.20
15,000 – 25,000 km 0.20 0.20 0.20 0.20 0.20
25,000 – 40,000 km 0.11 0.14 0.17 0.20 0.20
More than 40,000 km 0.07 0.10 0.13 0.17 0.20

There are two methods available to employers to determine the value of a car fringe benefit - the "statutory formula" method and the "operating costs" method. The statutory formula method is often preferred from a compliance perspective, as the "operating costs" method requires employees to maintain a log book record of business travel to determine the business percentage applicable to the car. Under the "statutory formula" method, a statutory fraction is applied to the base value of the car to determine its taxable value. The statutory fraction is a based on the total kilometres travelled in the year under the current four-tiered system.

While the budget announcement will significantly reduce the tax concessions available for those who drive more than 25,000km a year, the alternative "operating costs" method will still be available for those who use their car for a substantial amount of work-related travel. This will ensure that business use of a vehicle will be excluded from FBT.

What does this mean for employers?

  • The current seven per cent statutory fraction for cars that travel over 40,000km per year approximates an 80 per cent business use percentage if an employer was to use the alternative operating cost method. Where cars are used for a substantial amount of work-related travel, employers should consider using logbooks in accordance with Australian Taxation Office guidelines so not to incur a significant increase in the FBT liability associated with car fringe benefits.
  • Employers should revisit car policies, and implement a communication strategy for employees about the changes.
  • The phasing-in arrangements – particularly the 10 May 2011 start date impacting the current 2011-12 FBT year – mean that an employer's FBT calculations and record-keeping will be more complex throughout the transitional period. Work should start on adjusting in-house FBT software. Commercial FBT software suppliers will no doubt move quickly to issue updated versions of their existing software.
  • Employers who outsource their employee benefit arrangements should make contact with their provider and ensure they are prepared for the changes.

What does this mean for employees?

  • Car salary packaging arrangements will need to be revisited to understand the implications on the employee's total remuneration. Post-tax contribution strategies, where applicable, will need to be updated.
  • Car salary packaging arrangements will need to be revisited to understand the implication for an employee's reportable fringe benefits amount. This amount affects various surcharges (for example, the Medicare levy surcharge), liabilities (child maintenance) and entitlement to Government benefits.
  • Interestingly, the budget change is described by the Government as both a taxation and environmental reform. As shown in the above table, if an employee currently travels between 15,000 and 25,000 kilometres per year, the changes will make no difference to the taxable value of the car fringe benefit. If an employee travels over 25,000 kilometres per year, the tax benefit will decrease, but there will still be a tax benefit, so the employee is likely to continue to salary package and drive the car. If an employee travels less than 15,000 kilometres per year, it is less likely that they would have salary packaged a car as any tax benefit is inconsequential. However, by introducing a 20 per cent statutory rate on low kilometre users (for example for commuters who travel to and from work but not much additional travel), an employee may now be encouraged to start packaging a car. In terms of road congestion, these changes may very well increase peak hour travellers, but discourage drivers taking those long country drives on the weekend (allegedly in the last weeks of March each year).