Technical Update: Providing Exempt Vehicles to Employees

In July 2018 the Australian Taxation Office issued Practical Compliance Guideline PCG2018/3.  This document details the administrative approach the ATO will take in relation to employers providing employees with exempt vehicles. 

Exempt Vehicles

Section 8(2) of the Fringe Benefits Tax Assessment Act 1986 defines an exempt vehicle.  We will now consider how the ATO’s Practical Compliance Guideline PCG2018/3 applies.  If your business satisfies all the following conditions:

  1. You do not need to keep records about your employee’s use of the vehicles that demonstrates that the private use of the vehicle is ‘minor, infrequent and irregular’’; and
  2. The ATO will not devote any compliance resources to review that you can access the car-related exemptions for that employee.  This is commonly called a safe harbour provision.  This means that if you satisfy these conditions you should be safe from an ATO audit.

We will now consider the conditions contained in Practical Compliance Guideline PCG2018/3.  When necessary, additional detail will be provided regarding how the conditions operate.

Condition 1 – You provide an eligible vehicle to an employee

The first step to determining whether a vehicle is exempt is to review if the vehicle provided to an employee is an eligible vehicle.  The Fringe Benefits Tax Assessment Act 1986 defines an eligible vehicle as:

  • A taxi; or
  • A panel van or utility truck designed to carry a load of less than 1 tonne.

That sounds simple enough, however, with everything tax related it’s not quite that simple.  For example, is a dual cab ute classified as a utility truck designed to carry a load of less than 1 tonne or is it designed to carry passengers?  The answer of course is it depends.  In this particular example it is necessary to apply the formula set out in Miscellaneous Taxation Ruling MT2024 to determine whether the vehicle is principally designed to carry passengers or to carry a load. 

The ATO provides some basic guidance on their website which could be helpful in making an initial determination about whether a vehicle is designed for carrying a load or designed for carrying passengers.  If it doesn’t neatly fit into one of their eligible categories additional work will be required to make this determination. 

Condition 2 – The vehicle is provided is provided to an employee for business uses to perform their work duties

Condition 3 – At the time of acquisition the vehicle had a GST inclusive value of less than the luxury car threshold

Below is a table of the Luxury Car Threshold for the last 10 Years:

Financial year Fuel-efficient vehicles Other vehicles
2019–20 $75,526 $67,525
2018–19 $75,526 $66,331
2017–18 $75,526 $65,094
2016–17 $75,526 $64,132
2015–16 $75,375 $63,184
2014–15 $75,375 $61,884
2013–14 $75,375 $60,316
2012–13 $75,375 $59,133
2011–12 $75,375 $57,466
2010–11 $75,375 $57,466
2009–10 $75,000 $57,180

You can find the definition of a fuel-efficient vehicle on the ATO website.

Condition 4 – The vehicle is not provided as part of a salary packaging arrangement and the employee cannot elect to receive additional remuneration in lieu of the use of the vehicle

The definition of a salary packaging arrangement can be found at Section 136 of the Fringe Benefits Assessment Act 1986.  In simple terms a salary packaging arrangement involves an employee agreeing to reduce their salary in exchange for another benefit (for example a car).             

Condition 5 – You must have a policy in place that limits private use of the vehicle and obtain assurance from your employee that their use is limited to either work related travel and ‘minor, infrequent and irregular ‘private use’.

The condition has two parts:

  1. You must have a policy (generally this should be a written policy) in place to limit the private use of a vehicle by employees.  It is recommended that you ensure that all employees that drive eligible business vehicles read this policy.  Further, it is recommended that you receive a written acknowledgement from the employee stating that they have read this policy.
  2. Each FBT Year (which runs from 1 April to 31 March) you must obtain assurance from your employee that their private use is limited to either work related travel and ‘minor, infrequent and irregular ‘private use’.  The simplest way to obtain this assurance is have your employees complete a declaration.  The ATO has provided a template which could be used by your business.

Condition 6 – Your employee uses the vehicle to travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip.

Helpfully, the Fringe Benefits Tax Assessment Act 1986 defines work related travel to include between an employee’s place of residences and their place of employment.  Please note, that this definition of home to work travel as being work related travel only applies to eligible vehicles provided by employers to their employees.  It does not apply to individuals driving their own personal vehicle to and from work which is wholly private and not deductible. 

Consequently, an employee can use the eligible vehicle provided by the employer to travel to and from work and can make minor diversions for private reasons if diversion does not exceed 2 kilometres.  For example, an employee can drive from their home to work and make a diversion to drop their children off to school along the way provided this diversion does not exceed two kilometres. If the diversion exceeds two kilmetres the entire diversion will be treated as private and will need to be taken into consideration when considering the total private use of the vehicle at condition 7.

Condition 7 – Journeys undertaken for a wholly private purpose (other than travel between home and an employee’s place of work) must not exceed a total of 1,000km and 200km for any one return trip.

This condition also has two limbs:

  1. Any employees private travel must not exceed a total of 1,000km; and
  2. Any individual return journey must not exceed 200km.

These conditions should be included in the policy you develop at condition 5 to limit the employees private use.  Additionally, the assurance (declaration) you receive at condition 5 will help a business determine whether an employee has exceeded these limits.   As mentioned at condition 5 the ATO has provided a template which could be used by your business.

What happens when any of these conditions are failed?

If any one of these conditions are not satisfied a business cannot rely on the safe harbour provision set out in Practical Compliance Guideline PCG2018/3 a business must convince the ATO that the vehicle in exempt.  In practical terms this could be extremely difficult.    Therefore, practically if any one condition of Practical Compliance Guideline PCG2018/3 is not met the vehicle will no longer be treated as an exempt vehicle.

What are the consequences of the vehicle no longer be exempt?

If the vehicle is not an exempt vehicle then private use of the vehicle (including travel between home and work) must be taken into account when calculating the taxable fringe benefit of the vehicle.  Additionally, a log book must be maintained the determine the business use of the vehicle.  The ATO details the conditions of a valid logbook on their website.  In general terms a valid log book:

  1. Must cover a twelve-week period which is indicative of travel in a year
  2. Must show opening and closing odometer readings
  3. Must show business and private trips
  4. Is valid for 5 years
  5. If you have more than one vehicle the logbook period for each vehicle must be the same

Conclusion

In the past there has been significant confusion regarding what constitutes an exempt vehicle and particularly what constitutes minor, infrequent and irregular travel.  Practical Compliance Guideline PCG2018/3 provides some helpful additional guidance in this area.  This area of tax law initially seems straightforward at first glance but in is reality is quite complex.  If your business is providing utes and panel vans to your employees we recommend you contact us for a detailed discussion about the requirements to ensure your business is complying with its obligations under the Fringe Benefits Assessment Act 1986. 

Disclaimer

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Technical Update: Providing Exempt Vehicles to Employees