House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 5 - Reform of the car fringe benefits rules

Outline of chapter

5.1 Schedule 5 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 to reform the current statutory formula method for determining the taxable value of car fringe benefits by replacing the current statutory rates with a single statutory rate of 20 per cent, regardless of kilometres travelled.

Context of amendments

5.2 A fringe benefit is, generally speaking, a benefit provided in respect of employment. Fringe benefits are provided to employees (or associates of employees) in place of, or in addition to, salary or wages.

5.3 A fringe benefit usually takes the form of non-money income, such as the use of a company car for private purposes, but can also involve cash, for example where an employee is reimbursed by their employer for private expenses.

5.4 The fringe benefits tax (FBT) law was introduced in 1986 to ensure that all forms of employee remuneration are taxed, whether provided as salary and wages or in a non-cash form.

5.5 Before the introduction of the FBT law in 1986, providing fringe benefits to employees became a major source of tax avoidance and evasion, in particular for high income earners.

5.6 A fringe benefit will arise where an employee is provided with a car for private use (this includes home to work travel).

5.7 Car fringe benefits are valued using either the operating cost method or the statutory formula method.

5.8 Under the operating cost method, the taxable value of the benefit is based on the cost of owning and operating the car, reduced by the portion which relates to the business use of the vehicle. Employers are required to substantiate the business use of the vehicle by maintaining a log book for a specified period.

5.9 Under the statutory formula method, the taxable value of the benefit is based on the cost of the car multiplied by the relevant statutory percentage, which depends on the number of kilometres that the car has travelled, taking into consideration the number of days in the year the car fringe benefits were provided by the employer.

5.10 The statutory formula method is designed to provide employers with a low compliance cost alternative to the operating cost method, eliminating the need to maintain a vehicle log book. The statutory formula method removes the need to explicitly distinguish between the business and private use of a vehicle.

5.11 Currently, the statutory formula method for valuing car benefits uses progressive statutory fractions. That is, as the number of kilometres during the FBT year increases, the value of the fringe benefits fall (and hence the tax burden applied to those benefits also falls), even though there has been no substantive change to the benefits being provided.

5.12 Underlying this approach is an assumption that as distance travelled increases; the business use of the vehicle also increases.

5.13 Originally, three statutory percentages were proposed (0.24 for less than 25,000 kilometres, 0.16 for 25,000 to 40,000 kilometres and 0.08 for over 40,000 kilometres) for valuing car fringe benefits.

5.14 However, on 29 May 1986, the then Treasurer announced that as a result of discussions with the Australian Democrats, the Government would amend the statutory formula percentages in order to secure the passage of the overall FBT measure.

5.15 The rates that were introduced were:

5.16 The statutory formula percentages were increased in 1995-96 to their current rates. The below rates have applied from the FBT year beginning 1 April 1995.

5.17 However, the assumption that as distance travelled increases; the business use of the vehicle also increases no longer reflects current vehicle usage data.

5.18 This assumption pre-dates the advent of salary sacrifice arrangements.

5.19 The Australia's Future Tax System Review made the following findings about the current statutory rates:

'The statutory formula applies so that the taxable value of a car fringe benefit falls as total kilometres rise. At the margin, this may create an incentive for individuals to travel additional kilometres to reduce the taxable value of their car (particularly at the points at which the statutory fraction falls - 15,000, 25,000 and 40,000 kilometres). This increases pollution and road congestion.'

5.20 The Government announced on 10 May 2011 that it will reform the statutory formula method by replacing the current statutory rates with a single rate of 20 per cent that applies regardless of the distance travelled.

5.21 In the Treasurer's joint Media Release with the Assistant Treasurer and Minister for Financial Services and Superannuation of 10 May 2011, the Deputy Prime Minister and Treasurer, said:

'The Gillard Government will change the fringe benefit treatment of cars to remove the unintended incentive for people to drive their vehicle further than they need to, in order to obtain a larger tax concession.'

5.22 A flat statutory rate of 0.20 will better reflect the fair value of the private benefit being provided to the employee and places employees with access to fringe benefits on a more even footing with employees whose remuneration consists entirely of salary or wages.

5.23 The operating cost method for valuing car fringe benefits is not being altered and is available for employers to use.

5.24 Some cars are exempt from FBT (such as where there is only limited private use of a taxi, panel van or ute). There are no changes to these exemptions.

Summary of new law

5.25 A fringe benefit will arise where an employee is provided with a car for private use (this includes home to work travel).

5.26 Car fringe benefits are valued using either the operating cost method or the statutory formula method.

5.27 The statutory formula method is designed to provide employers with a low compliance cost alternative to the operating cost method, eliminating the need to maintain a vehicle log book. The statutory formula method removes the need to explicitly distinguish between the business and private use of a vehicle.

5.28 The new law applies a single statutory rate of 0.20 to car benefits valued under the statutory formula method, regardless of the distance the car travelled during the FBT year.

5.29 The formula for calculating fringe benefits payable on a car fringe benefit using the statutory formula method will now be determined by multiplying the base value of the car by the 0.20 statutory rate, taking into consideration the number of days in the year the car fringe benefits were provided by the employer.

5.30 The statutory formula method will still remain an administratively simple method for calculating the value of car fringe benefits but will now produce a fairer valuation of the private benefit being provided and remove the adverse environmental incentives existing in the current formula.

5.31 The operating cost method will remain unchanged, and is available for employers to use.

5.32 The change will apply to all car fringe benefits after 7:30 pm, AEST on 10 May 2011, except where an employee, employer or their associate has committed to the acquisition of the car that will be the subject of a car benefit (for a specified period of time) prior to 7:30 pm, AEST on 10 May 2011.

5.33 Changes for new contracts will be phased in over four years unless an employer elects to skip the transitional arrangements. However, an employer cannot force an employee to bear the impact of by-passed transitional arrangements merely to save on compliance costs.

5.34 The general intent of the transitional arrangements is to leave employers/employees who have pre-existing commitments (that is, those who have made financially binding decisions, in relation to a particular car, based on the old rules) under the old arrangements.

5.35 All car benefits will be covered by the new rules unless it can be proved that an agreement was in place prior to 7:30 pm, AEST on 10 May 2011, committing to the transaction. The car benefit does not need to have been delivered by 10 May 2011, but the commitment needs to be financially binding on one or more of the parties.

5.36 Changes made after 7:30 pm, AEST on 10 May 2011 to commitments made prior to 7:30 pm, AEST on 10 May 2011, such as re-financing a car, altering the duration of an existing contract or changing employers, are new commitments and will therefore be subject to the new arrangements.

5.37 If the new rules would begin to apply part way through a year (because of a change in commitment), the changes will commence from the beginning of the next FBT year.

5.38 Existing commitments will be grandfathered.

5.39 Employers and employees who seek to end existing contracts early and immediately enter into new contracts, just to get the benefit of new arrangements, may be caught by the general anti-avoidance provisions.

Comparison of key features of new law and current law

Detailed explanation of new law

5.40 Fringe benefits are provided to employees (or associates of employees) in place of, or in addition to, salary or wages.

5.41 A fringe benefit usually takes the form of non-money income, such as the use of a company car for private purposes, but can also involve cash, for example where an employee is reimbursed by their employer for private expenses.

5.42 FBT applies to virtually all employers, including government, and is designed to be as inclusive as possible in the coverage of benefits received by employees in respect of their employment. This means that benefits provided by employers to employees in respect of employment are taxed, whether received in cash or otherwise.

5.43 A fringe benefit will arise where an employee is provided with a car for private use (this includes home to work travel).

5.44 Car fringe benefits are valued using either the operating cost method or the statutory formula method.

5.45 Under the operating cost method, the taxable value of the benefit is based on the cost of owning and operating the car, reduced by the portion which relates to the business use of the vehicle. Employers are required to substantiate the business use of the vehicle by maintaining a log book for a specified period.

5.46 The statutory formula method is designed to provide employers with a low compliance cost alternative to the operating cost method, eliminating the need to maintain a vehicle log book. The statutory formula method removes the need to explicitly distinguish between the business and private use of a vehicle.

5.47 The new law provides a flat statutory rate of 0.20 for valuing car fringe benefits under the statutory formula method. This statutory rate applies regardless of the distance the car benefit was driven throughout the course of the year. [ Schedule 5, items 1 and 4, subsection 9(1 ) ( formula and definitions ), paragraphs 9(2 )( c ) and ( d )]

5.48 The formula for calculating the taxable value of the car fringe benefit under the statutory formula method is [ Schedule 5, item 1, subsection 9(1 ) ( formula and definition )]:

(0.2 * Base value of the car * Number of days during the year of tax on which the car fringe benefits were provided by the provider/Number of days in that year of tax) - Amount (if any) of the recipient's payment


5.49 The calculation for the base value of the car will be the same as under the previous rules.

Example 5.45: Salary sacrificed car

Tamara leases a car under a novated lease arrangement with her employer on 1 April 2020. The lease is a three-year lease. The base value of the car is $40,000. During the first FBT year, the car is driven 23,000 kms. The next year, it is driven 40,000 kms, and in the final year the car is driven 37,000 kms. The car is available to Tamara from 1 April 2020, and is available for the whole tax year. The car is solely for private use.

Under the statutory formula method, assuming no employee contribution, the FBT taxable value would be:

for the 2020-21 FBT year: = 0.20 * $40,000 = $8,000

for the 2021-22 FBT year: = 0.20 * $40,000 = $8,000

for the 2022-23 FBT year: = 0.20 * $40,000 = $8,000

Each year, the FBT payable would be $8,000 * 0.465 (the FBT rate) * 2.0647 (the FBT GST-inclusive gross-up rate) = $7,681.

Under the statutory formula method, the distance driven by the car throughout the FBT year is irrelevant.

Example 5.46: Salary sacrificed car

Chris leases a car under a novated lease arrangement with his employer on 1 January 2015, on a four-year lease. The base value of the car is $50,000. The car is used 50 per cent of the time for private use and 50 per cent for work-related use.

During the first FBT year, if Chris makes no employee contribution, the taxable value of the car fringe benefits under the statutory formula method would be:

0.20 * 50,000 * 90/365 = $2,466


The amount of FBT payable would be $2,466 * 0.465 * 2.0647 = $2,368.

Chris's employer could also require him to keep a log book for 12 weeks during the first FBT year to work out the FBT payable under the operating cost method. The employer could then elect to apply this method to the car fringe benefits.

Application and transitional provisions

5.50 The reforms will apply to all car fringe benefits after 7:30 pm, AEST on 10 May 2011, unless it can be proved that there was a pre-existing commitment in place to provide a car. [ Schedule 5, item 8 ]

5.51 A commitment is considered entered into at the point that there is commitment to the transaction, and it cannot be backed out of. The commitment needs to be financially binding on one or more of the parties.

5.52 Changes made after 7:30 pm, AEST on 10 May 2011 to commitments made prior to 7:30 pm, AEST on 10 May 2011, such as re-financing a car, altering the duration of an existing contract or changing employers, are new commitments and will therefore be subject to the new arrangements.

5.53 If, however, the amendments do not apply in relation to a car, in relation to an employer, at the start of an FBT year (or from the time the car was first held if that happens after the beginning of the year), and the amendments begin to apply in relation to that car, in relation to that employer during that FBT year, the amendments will instead begin to apply from the start of the next FBT year. [ Schedule 5, item 8 ]

Example 5.47: Transitional arrangements

During April 2011, Constance begins discussions with a salary packaging provider about obtaining a car through a salary sacrifice arrangement. On 2 May 2011, Constance agrees to a particular option with the provider, and the car is ordered. She signs a contract with her employer.

The car is scheduled for delivery on 1 August 2011, at which point she will sign documents with the leasing provider for the provision of the car.

Constance entered into a commitment prior to 7:30 pm, AEST on 10 May 2011, and her contract will be grandfathered.

Example 5.48: Transitional arrangements

Tim is provided with a salary sacrificed car on a lease contract that lasts the sooner of two years or 40,000 kms, commencing 1 January 2010.

On 17 August 2011, as Tim is nearing the 40,000 kms, he gets the contract changed to allow for 50,000 kms. This would be considered a new commitment, and from 1 April 2012, the contract would move to the new arrangements (under the transitional arrangements). (Since the amendments begin to apply part way through an FBT year in relation to a car that was available from 1 April, the new arrangements will apply from 1 April 2012.)

Example 5.49: Transitional arrangements

Travel Co. owns a fleet of cars which are provided to the managers of certain divisions. There is a standing employment agreement with such employees that a car will be provided to them for the duration of their employment with the company.

For each employee, every two years, the car provided is replaced with a new one.

One such car is ordered on 15 May 2011, and the car is replaced on 15 June 2011. If the statutory formula method is used to value the car fringe benefits, the car would fall under the new arrangements.

Example 5.50: Transitional arrangements

Blake entered into a novated lease arrangement with his employer for a car benefit in 2009. The lease expires in September 2011. Blake travelled 32,000 kms in the 2011-12 FBT year. The car is valued under the statutory formula method.

In August, Blake decides to re-finance the same car for another year, and signs a form saying he is extending the lease by 12 months. This would be considered a new arrangement, and Blake will now fall under the new arrangements for valuing car fringe benefits (from the beginning of the next FBT year following the date he signed, 1 April 2012).

Since the amendments begin to apply part way through an FBT year in relation to a car that was available from 1 April, the statutory rate of 0.11 will apply for the entire 2011-12 FBT year with the amendments beginning to apply from 1 April 2012.

From 1 April 2012, a rate of 0.17 will apply.

Example 5.51: Transitional arrangements

Tom entered into a salary sacrifice arrangement for the provision of the use of a car under a novated lease on 1 March 2010. The lease expires 1 March 2013.

On 15 September 2011, Tom decides to have the car windows tinted.

Adding this accessory will not result in a new commitment, and Tom's contract will remain grandfathered until 1 March 2013.

Example 5.52: Transitional arrangements

Anna works for X Co, and enters into a novated lease arrangement with her employer in January 2010. The lease runs until January 2013. The car fringe benefit is valued under the statutory formula method.

On 12 November 2011, Y Co. officially takes over X Co, and Anna is now an employee of Y Co.

From 12 November 2011, any car benefits provided to Anna will come under the new arrangements.

5.54 Employers and employees who seek to end existing contracts early and immediately enter into new contracts, just to get the benefit of new arrangements, may be caught by the general anti-avoidance provisions.

5.55 The rates will be phased in over four years according to Table 1.1 [ Schedule 5, item 9 ]:

5.56 A contract entered into after 7.30 pm, AEST on 10 May 2011, where the car travels 30,000 kilometres per annum, would use the statutory rate of 0.14 from the start of the contract until 31 March 2012, 0.17 from 1 April 2012 until 31 March 2013, then the statutory rate of 0.20 thereafter.

Example 5.53: Transitional arrangements

James enters into a novated lease arrangement on 1 July 2012 for a car with a base value of $35,000. The lease on the car is for three years, running until 30 June 2015.

In the FBT period from 1 July 2012 to 31 March 2013, James drives 35,000 kms. From 1 April 2013 to 31 March 2014, James drives 42,000 kms in the car. From 1 April 2014 until the end of the lease, James drives 10,500 kms.

From 1 July 2012 until 31 March 2013, the annualised kilometres driven would be 35,000 * 366 / 275 = 46,582 kms. As such, the statutory rate applied to the car fringe benefits would be 0.13.

From 1 April 2013 to 31 March 2014, when James drives 42,000 kms, the statutory rate of 0.17 would apply.

From 1 April 2014 until the end of the lease, the annualised kilometres driven would be 10,500 * 365 / 91 = 42,115 kms. The statutory rate applying to the lease would be 0.20.

5.57 An employer can choose to skip the transitional arrangements and directly use the flat statutory rate of 0.20 if they choose. The way an employer's return for the relevant year of tax is prepared is sufficient evidence of the making of the choice. [ Schedule 5, item 9 ]

5.58 However, the election to opt-in to the new rules is not effective without the consent of affected employees in cases where, in making an election, an employee would be worse off as a result of their employer making the election. This covers situations where an employee is at a financial disadvantage (without their consent) where their employer opts to skip the transitional arrangements. [ Schedule 5, item 9 ]

5.59 This ensures an employer cannot force an employee to bear the impact of by-passed transitional arrangements merely to save on compliance costs.

Consequential amendments

5.60 There are also some changes being made as a result of the reforms for FBT and car fringe benefits to tidy up and update affected provisions. [ Schedule 5, items 2, 3, 5, 6 and 7, subparagraphs 9(2 )( a )( i ) and 9(2 )( e )( i ), paragraph 9(2 )( b ), subsections 9(2 ) and 136(1 )]

5.61 Some provisions that are no longer required under the new rules will be repealed once existing contracts (which are being grandfathered) are no longer in existence. [ Schedule 5, items 10 to 12, subsections 135K(4 ), 9(1 ) ( note ) and 136(1 ) ( definition of ' annualised number of whole kilometres' )]