Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 4 - Fringe benefits tax - deemed depreciation rate for cars
Outline of chapter
4.1 Schedule 4 to this bill amends subsection 11(1) of the Fringe Benefits Tax Assessment Act 1986 to ensure that alignment between the FBT deemed depreciation rate used under the operating cost method for valuing a car fringe benefit and the Commissioner's determination for the effective life of the car is maintained.
Context of amendments
4.2 The Commissioner announced on 20 June 2002 that, for cars acquired after 30 June 2002, the effective life would be increased from six years and eight months to eight years for income tax depreciation purposes.
4.3 An amendment is required to realign the deemed depreciation rate used under the operating cost method for valuing car fringe benefits with the new effective life determination.
4.4 The approach taken in this amendment of setting the deemed depreciation rate by reference to the Commissioner's determination of the effective life of the car (rather than simply replacing the current figure in the legislation with a new one) is designed to ensure that further legislative amendment will not be required should the Commissioner's effective life determination change in the future.
Summary of new law
4.5 Under this amendment, the deemed depreciation rate used in calculating a deemed depreciation amount will be calculated by reference to the Commissioner's determination for the effective life of that car as applies at the most recent time the provider of the car fringe benefit becomes the owner of the car.
| New law | Current law |
|---|---|
| The deemed depreciation rate used under the operating cost method for valuing a car fringe benefit will be calculated as:
|
The deemed depreciation rate used under the operating cost method for valuing a car fringe benefit is set at 22.5%. |
Detailed explanation of new law
4.6 Where the operating cost method is used by a taxpayer to calculate the taxable value of a car fringe benefit, a deemed depreciation amount is included in the valuation if the car is owned (or deemed to be owned) by the provider of the fringe benefit.
4.7 Subsection 11(1) of the Fringe Benefits Tax Assessment Act 1986 sets out the depreciation formula used to calculate the deemed depreciation amount. This formula currently includes a figure representing the deemed depreciation rate. The rate is currently set in the legislation at 22.5%.
4.8 This figure is based on an effective life of cars of six years and eight months calculated using the diminishing value method; namely:
150% / effective life of cars of 6
⅔
years = 22.5%
The Commissioner is empowered to determine the effective life of depreciating assets under the capital allowance provisions by virtue of section 40-100 of the ITAA 1997.
4.9 Under this amendment, the deemed depreciation rate will be calculated as:
150% / effective life of the car
where the effective life of the car is the car's effective life as set out in the determination in force (as made by the Commissioner under the capital allowance provisions) at the most recent time the provider becomes the owner of the car. [Schedule 4, item 2, subsection 11(1AA)]
Example 4.1
Christine purchases a standard 6-cylinder family car on 1 August 2003 and provides it as a fringe benefit to her employee Nathalie. Christine chooses to calculate the taxable value of the car fringe benefit using the operating cost method. As Christine owns the car, she includes an amount of deemed depreciation in calculating the taxable value of the vehicle.
The Commissioner's determination of the effective life of this type of car in force at the time Christine becomes the car's owner is eight years. Accordingly, the deemed depreciation rate that Christine will use in calculating the deemed depreciation amount will be:
150% / 8 = 18.75%
4.10 In accordance with subsection 10(3) of the Fringe Benefits Tax Assessment Act 1986, the changes made by this amendment also apply to non-business accessories fitted to cars valued using the operating cost method.
Application and transitional provisions
4.11 The amendment applies in respect of cars acquired after 30 June 2002. The amendment only affects car fringe benefits valued using the operating cost method and does not affect cars valued using the statutory formula method.