Business mentor: Savings possible by using correct FBT structure on vehicles

My staff drive company vehicles as part of their daily job and take them home at night. Because I allow them to take them home, my accountant tells me I have to pay fringe benefits tax (FBT), even though they drive the vehicles for private purposes only 10 per cent of the time. This doesn't seem fair; is there any way I can mitigate my FBT liability? What about these nine-to-five leases?

Matt Baker, associate director in the taxation division of Staples Rodway, replies:

Unfortunately, your accountant is correct. Because you provide your employees with vehicles which are available for private use, FBT is payable. Also, from April 1, 2006, any nine-to-five type lease structures (where an employee leases a car to an employer for business purposes) are subject to full FBT. But there are still opportunities to make savings.

The first piece of good news is that employers who provide vehicles effectively received a tax cut on April 1. Previously, the fringe benefit of providing a vehicle was calculated as 24 per cent of cost price - this rate dropped to 20 per cent.

This represents a significant tax cut, reducing an employer's FBT bill by more than 16 per cent.

An employer can further reduce their FBT liability by keeping a record of when vehicles are not available for private use, for instance, when employees are on business trips and other days, including emergency call days.

FBT is not payable on work-related vehicles if they are not available for private use.

For work-related vehicles, private use does not include driving the vehicle home. A work-related vehicle is one which has the employer's name prominently displayed on the vehicle and is not designed principally for the carriage of people. Generally, utes and station wagons (if their back seats are permanently fixed down) are considered to be work-related vehicles.

But as a rough guide, if the vehicle is not a work-related vehicle and is used more than 50 per cent of the time for business purposes, it's unlikely that having the vehicle in the FBT net is an efficient option, even with the reduced rates.

Now we get to the really good news - there is still an arrangement where an employer can get a tax deduction for proper business use of a motor vehicle without being hit with FBT.

This requires the employee to acquire the vehicle and claim back business-related costs from the employer. This is tax-free in the employee's hands and deductible to the employer, and no FBT.

But there is a catch - because of the way legislation is drafted, depreciation on owned vehicles cannot be reimbursed.

To receive full reimbursement, the employee needs to enter into an operating lease, where the depreciation is reflected in the lease payment. This leaves the employer in a similar position to a nine-to-five lease.

It is recommended that before acquiring a vehicle, employers contact their tax adviser. Significant FBT savings are still available by adopting the correct structure.

For more information on FBT, contact Matt Baker on ph 309-0463 or email matt.baker@staplesrodway.com