If you’re an employer who is using a business car or providing cars to your employees, here’s what you need to know.
What is a car fringe benefit?
A car fringe benefit commonly arises when an employer makes a car they own or lease available for the private use of an employee. If you conduct your business through a company or trust, you may be an employee of the company or a trust.
A car is made available for private use by an employee on any day the car:
- is used for private purposes by the employee or associate
- is not at your premises, and the employee is permitted to use it for private purposes
- is garaged at their place of residence, regardless of whether they have permission to use it privately.
Learn how to calculate the taxable value of a car fringe benefit here: Car Fringe Benefit Factsheet
Employee business cars tips & traps
The provision of company cars to employees is a regular practice across the Australian business landscape. Generally, there are two reasons to provide a car to an employee:
- It’s a requirement of the job that employees travel regularly for work purposes, so providing a car will allow employees to effectively perform their duties.
- employers want to give themselves an advantage over their competitors being ‘employers of choice’, attracting the best and brightest, by converting non-deductible private vehicles to tax deductible company cars for their employees.
Granting employees’ access to company cars is treated by the ATO as a ‘non-cash benefit’, more commonly referred to as a fringe benefit. Fringe benefits provided to employees and/or their associates are subject to Fringe Benefits Tax (FBT), which is currently set at 47% of a benefit’s grossed-up taxable value.
With the tax rate for fringe benefits set at 47%, the obvious question is why would small business owners grant an employee access to a company car? Considering that the great majority of Australian taxpayers are currently paying marginal tax rates of between 34.5% and 39% (for the 2024 financial year and including the Medicare levy) it seems counter-intuitive to allow this. After all, this does translate to an additional 8% to 12.5% tax liability that could be avoided if the employee were simply given a pay rise. The answer to this question lies in how the ‘taxable value’ of the fringe benefit (i.e. the car) is calculated. The taxable value of a car fringe benefit is meant to reflect an employee’s ‘private use’ of the vehicle, as only the private use of the car is subject to FBT. Additionally, the FBT law allows ‘employee contributions’ to reduce the taxable value of the car fringe benefit to nil.
This effectively, allows a fringe benefit to be taxed at the employee’s marginal tax rate and not the FBT rate.
As such, employers can provide employees with extra value without incurring additional expenses.
Learn how to avoid expensive traps when calculating the taxable value of a car fringe benefit by downloading Employee Business Cars Tips & Traps Factsheet.
Exempt car benefits
Work-related travel in commercial cars
A car benefit will be exempt where the vehicle is a taxi, panel van, utility or other motor vehicle benefit will be exempt where the vehicle is a taxi, panel van, utility or other road vehicle designed to carry a load other than passengers of less than one tonne, and the employee’s private use is limited to incidental or minor. The benefit of these vehicles is that travel between home and work is considered work-related.
Cars used for emergency services
Cars used for emergency services that are garaged or kept at or near an employee’s residence are exempt car benefits, where the car used is police, ambulance or firefighting services vehicle; is fitted with flashing warning lights and a siren and has exterior markings which indicate its use.
Cars supplied by personal entities
A personal service entity is unable to deduct car expenses from more than one car used by an individual. The second car benefits are exempt in relation to an FBT year.
Electric cars exemption
From 1 July 2022 employers do not pay FBT on eligible electric cars and associated car expenses.
You do not pay FBT if you provide private use of an electric car that meets all the following conditions:
- The car is a zero or low emissions vehicle
- The first time the car is both held and used is on or after 1 July 2022
- The car is used by a current employee or their associates (such as family members)
- Luxury car tax (LCT) has never been payable on the importation or sale of the car.
Benefits provided under a salary packaging arrangement are included in the exemption.
Learn more: Navigating electric vehicle tax
ATO outlines new safe harbour provisions
Workhorse vehicles are generally exempt from the car fringe benefit rules, provided they are only used for work related travel including home to work travel and private use of that vehicle is restricted to minor, infrequent and irregular use. For example, irregular dropping off / picking up children to school on the way to / from work. Where the private use is more than minor, infrequent and irregular a residual fringe benefit has been provided and there is a different method to work how much FBT is payable.
A workhorse vehicle is a panel van, utility (ute) or other commercial vehicle (that is, one not designed principally to carry passengers) such as a dual cab ute with a carrying capacity of one tonne or more.
Download the Workhorse Vehicles and new Safe Harbour Provisions Factsheet to learn the details.
Key things you must have done by 31 March
While it is strongly recommended that you register for FBT and, if applicable, lodge a Nil FBT return, if you decide not to, there are still key information you need to record as at 31 March. This information will be needed for the completion of your annual financial statements:
- On 31 March, when your team have finished their travel for the day, request them each to take a photo of their vehicle odometer readings using their phones and email it to you or to a nominated person in your business to collate them all for you. Having these vehicle odometer readings for all business vehicles is vital to examine ways your FBT can be reduced.
- Carefully manage the private use of business cars, including the travel between home and work. The ATO is conducting a data matching program aimed at motor vehicles to capture benefits not currently reported through FBT. If significant variances are identified, a full ATO audit may follow.
Contact KMT accountants now for further assistance with your FBT Return lodgement!
About our adviser: Chrisanthe Lekatis is renowned for her expertise in management accounting, virtual CFO services, and top-tier business advice. She empowers management with tailored strategies for success, streamlining processes to achieve efficient and cost-effective outcomes. Her commitment to building trust and lasting relationships goes beyond professional excellence; it’s a personal ethos. By actively listening and understanding her clients’ businesses and goals, Chrisanthe thrives on collaborative efforts to navigate challenges and collectively achieve their aspirations. Please do not hesitate to reach out if you need assistance.
Michael Fox has been dedicated to the success of his clients, devising comprehensive wealth strategies for both personal and business growth for over 4 decades. With extensive expertise in business governance and family business succession, Michael specialises in empowering emerging businesses and family enterprises by fostering renewal, enhancing value and smooth transitions to the next generation. Please do not hesitate to reach out if you need assistance with your business valuation.
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or professional advice from an accountant at KMT Partners.
