There are many advantages associated with company cars; however, having a fleet of vehicles is more than just handing over the keys. It is crucial for business owners to understand how taxes on your company vehicles work.
Do you use a company car? Do you have employees who use your company’s vehicles? If you do, then you need to understand how various taxes affect you.
What is a Fringe Benefits Tax?
If you are using business owned vehicles, you need to be aware of the rules that determine whether you need to pay Fringe Benefit Tax.
A Fringe benefits tax refers to a tax that employers pay for benefits (other than a salary or wages) paid to employees. This tax is separate from income tax and is calculated based on the taxable value of the benefits provided.
The Australian Taxation Office (“ATO”) has provided useful guidelines in relation to FBT:
- A fringe benefit is a benefit provided in respect of employment. This effectively means a benefit is provided to somebody because they are an employee*.
- According to the ATO, a car fringe benefit most commonly arises where an employer makes a business owned or leased car available for the private use of an employee
According to the ATO, only some vehicle types are classified as a car for the purposes of FBT. They also have guidelines around when a vehicle may be classified as being available for private use. As at the date of this article, the ATO has classified the following types of vehicles (including four-wheel drive vehicles) as cars for the purposes of FBT and provide the below classifications around availability for private use.
To calculate the taxable value of a car fringe benefit, you can use the statutory formula method or the operating cost method.
You're permitted to choose the method that leads to the lowest taxable value and you can switch between the two methods from year to year. However, if you want to use the operating cost method, you will need to keep the required documentation in the form of a vehicle log book. Otherwise, you will have no choice but to use the statutory formula method.
What is a Capital Gains Tax?
According to the ATO, a capital gains tax refers to a tax on any capitals gains, which are profits from selling non-inventory assets. Sales of property, stocks, precious metals, and bonds often lead to capital gains.
Some forms of capital gains are tax-exempt — meaning you don't have to include them when it comes to your assessable income. Also, some capital losses are tax-exempt and cannot be used to offset capital gains. Any capital gains or losses for vehicles are tax-exempt. When it comes to the capital gains tax, a car is defined as a motor vehicle that is intended to transport fewer than nine passengers or has a carrying capacity of less than a ton. Therefore, when it comes to your company vehicles, you don't have to worry about paying a capital gains tax.
Company Vehicle Expenses
The ATO states that companies are allowed to claim expenses for cars owned or leased under the condition that the expenses for the cars are incurred from regular business operation. A company claiming expenses may be asked to prove how the expenses were a result of everyday business operations. The costs for providing employees with a motor vehicle can be included as long as the employee needs the vehicle to do their job. If employees use cars for private rather than business purposes, the company may need to pay FBT, which is tax-deductible.
As stated above, you will need to keep a vehicle log book if you want to use the operating cost method rather than the statutory formula method to calculate the fringe benefits tax for your company vehicles. You can use technology to make your vehicle log books easier to administer. If you want to get a tax deduction for your company vehicles, your logbook needs to be as valid and current as possible and there is plenty of software on the market that will help you accomplish this.
To create a log book for your vehicles, you will need to log every business journey for a period of 12 weeks. The 12-week period should accurately represent the number of kilometres the vehicles travel for business annually. You will need to prepare a new vehicle log book every five years. The overall purpose of a vehicle log book is to determine how much your company vehicles are used for business matters.
What is Novated Leasing?
A novated lease is a three-way agreement between an employer, an employee, and a financier. The employer usually leases a car on behalf of the employee and allows the employee to get a salary cut to cover the lease payments. The main advantage of novated leasing for your employees is that it can be tax-effective.
What is Depreciation?
The value of a business vehicle declines with time due to wear and tear. Business owners can claim back the cost of motor vehicle depreciation as a tax deduction for their company vehicles. Businesses can claim motor vehicle depreciation by using simplified depreciation rules or general depreciation rules. According to general depreciation rules, businesses can use ATO determination or self-assessed determination.
To track and control your fuel expenses, consider using fuel cards for greater convenience. Not only will the use of fuel cards provide you with vital information about your company vehicle expenses and how you can reduce them, but they particularly come in handy around tax time. By consolidating all your fuel purchases into regular consolidated invoices, they reduce data entry and simplify your bookkeeping.
Understanding the ins and outs of taxes when it comes to company vehicles is one effective way for you to save on tax payments significantly. Knowing these tax terms and what they mean for you and your business will help ensure you have everything you need to effectively manage your company’s vehicles while staying on top of government tax regulations.
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