SENATE

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)

Chapter 9 - Substantiation rules and period for retention of records

Overview

9.1 The amendments in Schedule 6 of this Bill will make the substantiation rules in the Fringe Benefits Tax Assessment Act 1986 (FBTAA) consistent with the new income tax substantiation rules. These amendments are explained in Section 1 of this chapter.

9.2 Also, the retention period for fringe benefits tax (FBT) records will be reduced from 7 years to 5 years. This amendment is explained in Section 2 of this chapter.

Section 1 - Changes to the substantiation rules

Summary of the amendments

Purpose of the amendments

9.3 The amendments will ensure that the requirements of the substantiation provisions for income tax and fringe benefits tax continue to be similar for taxpayers and employers.

Date of effect

9.4 These amendments will apply to assessments for the FBT year commencing on 1 April 1995 and later years. [Item 74]

Background to the legislation

FBT substantiation rules

9.5 The taxable value of a fringe benefit can be reduced in accordance with the proportion of employment related use of the fringe benefit. Some supporting documentation is normally required for this reduction and the general calculation of taxable values.

9.6 The documentation required under the FBT substantiation rules depends on the type of fringe benefit and the method used for calculating the value of the fringe benefit. In many cases, an employee declaration is sufficient. Where an employer has paid for an employee's private expenses, or reimbursed an employee for private expenses, invoices and/or receipts must be retained. A petty cash book may be kept for small expenses. Where a fringe benefit is provided in respect of certain travel, a travel diary must kept by the employee.

9.7 Where a car fringe benefit is provided (i.e. the employer has made a car available for the private use of an employee), or a fringe benefit is provided in relation to an employee's car, a log book and odometer records must be maintained together with other documentation, e.g. receipts of car expenses.

Changes to the income tax substantiation rules

9.8 The FBT substantiation rules are similar to the income tax substantiation rules for the deduction of employment-related expenses. The Tax Law Improvement (Substantiation) Act 1995 made a number of changes to the substantiation provisions of the Income Tax Assessment Act 1936 . The purpose of the changes was to make the evidential rules less cumbersome.

9.9 This Bill will amend the FBTAA to bring the FBT substantiation rules into line with the new income tax rules.

Explanation of the amendments

How is the business use percentage of a car calculated?

9.10 The proportion of business use of a car must be estimated for the purpose of calculating the taxable value of a car fringe benefit under the operating cost method. The ' business use percentage ' must also be estimated under one of the methods for reducing the taxable value of a fringe benefit provided in relation to an employee's car under the otherwise deductible rule.

9.11 Under the existing rules, different methods for determining the percentage of business use of a car apply in different circumstances. The percentage of business use that applies in some circumstances may differ from the actual percentage of business use.

New rule

9.12 Under the new rules, the business use percentage will be based on the number of business kilometres travelled during the tax year in all cases [item 33; new definition of 'business use percentage' in section 136(1)] . Section 10, which sets out the method for calculating the value of a car fringe benefit under the operating cost method, will be amended accordingly [items 6, 7 and 8] .

9.13 Each year an employer must make a reasonable estimate of the number of business kilometres travelled in the car. This estimate must take all relevant matters into account. [Item 57; new definition of 'reasonable estimate of number of business kilometres' in section 162F]

Log book records, etc, will still be required

9.14 The employer will still be required to keep a log book and odometer records, which may be used to support the estimate of business kilometres together with any other relevant records.

9.15 The Commissioner's discretion to permit an employer not to keep a log book or odometer records if the requirement to do so is unreasonable will be removed. Circumstances rarely, if ever, arise where the Commissioner is called upon to exercise this discretion.

9.16 Sections 10A [item 9] ,10B [item 10] , 65E [item 18] and 65F [item 19] will be amended accordingly.

Penalty tax

9.17 The existing penalty for over-estimating the business percentage applicable to a car will be replaced with a similar penalty for over-estimating the number of business kilometres travelled by a car. [Item 22; new section 115A]

Rules that are no longer required

9.18 These rules will not be retained as part of the new rules because they are unnecessary:

•

Excessive estimates: Under the existing rules, the business use percentage specified by the employee determined the amount by which the taxable value was reduced. Accordingly, special rules set out in sections 10C and 65H were necessary to reduce an excessive or unreasonable estimate of the business percentage. It was also necessary to deem a business use percentage to have been specified if an employer had failed to specify a percentage.

These rules will no longer be required because the calculation of the business use percentage will be determined by reference to a reasonable estimate of business kilometres rather than the percentage specified by the employer. Sections 10C [item 11] and 65H [item 21] will be repealed.

•

Unsigned or fraudulent entries in log books: Because the calculation of the business use percentage will be determined by reference to a reasonable estimate of business kilometres rather than the log book percentage, the rule disregarding unsigned or fraudulent entries in log books will no longer be required. Section 162E will be repealed. [Item 56]

•

Failure to record in car records: An employer is deemed under section 162D to have recorded these matters in car records if he or she inadvertently fails to record them. This rule will not be required under the new rules. Section 162D will be repealed. [Item 56]

•

Log book anti-avoidance rule: The rule set out in section 162M will be removed because it is no longer necessary under the new log book rules. Section 162M requires that a car that has been re-acquired must be treated as a different car for the periods before disposal of the car and after the re-acquisition of the car to ensure that a different pattern of use after re-acquisition would be taken into account. Under the new log book rules, the business use percentage will always be calculated using a reasonable estimate of business kilometres for the relevant period. [Item 73]

Redundant terms and concepts

9.19 Under the new rules, the following terms and concepts are redundant and will be removed:

•

'business percentage established during log book period' in section 162J [item 68] .

•

'car deduction percentage' in section 65G [item 20] . The value of fringe benefits provided in respect of employees' cars will be reduced under the otherwise deductible rule by the business use percentage in all cases.

•

'car records' in subsection 136(1) [item 35] .

•

'low business kilometre car' in subsection 136(1) [item 44] . The business use percentage will be calculated in the same way for all cars regardless of the number of business kilometres travelled.

•

'nominated business percentage' in subsection 136(1) [item 45] . An employer will be required to record an estimate of business kilometres and the business use percentage.

•

'reasonable estimate of underlying business percentage' in section 162F [item 57] . This concept has been replaced by the concept of 'reasonable estimate of underlying business kilometres'.

•

'underlying business percentage' in subsection 136(1) [item 55] . This concept has been replaced by 'business use percentage'.

When must a log book be kept?

9.20 Under the new rules, an employer will generally be required to keep a log book for the first year and then every five years [items 58 and 61; new paragraphs 162G(1)(a) and 162G(2)(a)] . This rule will replace a number of circumstances under which a new log book must be kept under the existing law [items 59, 60, 62 and 63] . It will no longer be necessary for an employer to advise the Commissioner of Taxation of an election to treat a year as a log book year [item 64] .

What period must a log book be kept for?

9.21 A log book must be kept for 12 weeks. Under existing section 162H, a log book period must begin and end in the same tax year. This restriction will be removed [item 66] . It will be possible to keep a log book that overlaps 2 tax years.

Record of certain matters

9.22 Matters required to be recorded in what are currently referred to as 'car records' will be recorded in the log book or simply in writing. Section 162H will be amended so that the log book period must be recorded in the log book. [Item 65 and 67]

9.23 The employer's estimate of business kilometres and the business use percentage must be recorded in writing before the declaration date. [Item 28, new section 123A]

9.24 The nomination of replacement cars must be recorded in writing before the declaration date. [Items 69, 70, 71 and 72; new subsections 162K(2A) and 162L(2A)]

9.25 The records of these matters will continue to be 'statutory evidentiary documents' under the new rules. [Items 50, 51, 52 and 53; new paragraphs (aa) and (ab) in the definition of 'statutory evidentiary document' in subsection 136(1)]

Definition of car

9.26 The definition of 'car' in subsection 136(1) will be amended to clarify that a panel van or utility truck designed to carry loads of 1 tonne or more is not a car for FBT purposes. [Item 34]

9.27 A similar amendment will be made to subparagraph 8(2)(a)(i), which sets out the rules for exempt car benefits. [Item 1]

Entries in log book and odometer records, petty cash books and travel diaries

9.28 The requirements for making these entries will be simplified:

•

Log book: the definition of 'log book records' in subsection 136(1) will be amended so that an entry in a log book will not have to include the driver's name, the entry maker's name or the date on which the entry was made [items 41 and 42] . Nor will the entry have to be signed by the entry maker [item 43] .

•

Odometer records: the definition of 'odometer records' in subsection 136(1) will be amended so that an entry in odometer records will not have to include the entry maker's name or the date on which the entry was made [items 46 and 47] . Nor will the entry have to be signed by the entry maker [item 48] .

•

Petty cash book: under new subsection 24(4) , an entry in a petty cash book will not have to be signed by or on behalf of the provider of a benefit [item 15] .

•

Travel diary: the definition of 'travel diary' in subsection 136(1) will be amended so that an entry in a travel diary will not have to include the date on which the entry was made [item 54] .

Travel diaries not to be required for short-term overseas travel

9.29 A travel diary will no longer be required for travel outside Australia for trips of 5 nights or less. The definitions of 'extended travel airline transport benefit' [item 36] , 'extended travel expense payment benefit' [item 37] , 'extended travel property benefit' [item 38] and 'extended travel residual benefit' [item 39] in subsection 136(1) will be amended accordingly.

Retention period for documentation

9.34 Statutory evidentiary documents are, in general terms, documents required by the substantiation rules apart from documentary evidence of expenses. These documents include declarations, valuers' reports, car records, log book records and odometer records.

9.35 The period for keeping statutory evidentiary documents is to be reduced from 6 years to 5 years. Item 49 amends the definition of 'retention period' in subsection 136(1) accordingly.

What if documentation is lost or destroyed?

9.36 The general rule is that the value of a fringe benefit cannot be reduced to reflect employment related use in the absence of supporting documentation. However, an employer may still reduce the value of a fringe benefit where the necessary documentation has been lost or destroyed.

9.37 Section 123 will be amended to simplify the rules relating to lost or destroyed documents. It will be irrelevant whether the original documentation was lost because of circumstances beyond the employer's control. Nor will it matter whether it is reasonably practicable for an employer to obtain a copy of a document. [Items 23, 24, 25, 26 and 27]

9.38 If a document is lost or destroyed, an employer will be protected if the employer has a complete copy of the document or, if a complete copy is not available, all reasonable precautions were taken.

9.39 An employer will also be protected if a document is lost or destroyed before it is given to the employer by the employee and a complete copy is not available but the employee had taken all reasonable precautions.

Commissioner's discretion to review failure to substantiate

9.40 Under the existing law, the substantiation rules do not apply if the Commissioner is satisfied that a benefit has been provided and it would be unreasonable for the substantiation rules to apply. The Commissioner must consider the nature and quality of the employer's evidence and any other special circumstances, including the extent to which the employer attempted to follow the rules and whether any failure was deliberate.

9.41 Section 123B will be amended so that the Commissioner will need to consider only the nature and quality of the employer's evidence. [Item 29]

Time limit for obtaining written evidence

9.42 The existing law requires that documentary evidence of expenditure must be obtained by the employee and given to the employer before the declaration date. The declaration date is the date of lodgment of the FBT return or a later date allowed by the Commissioner.

9.43 The time for obtaining documentary evidence of expenditure will be extended [item 32; new section 132A] . An employer will be able to take an expense into account in preparing his or her return even though evidence of the expense has not been given to the employer by the declaration date if the employer has a good reason to expect that the evidence will be provided within a reasonable time.

9.44 However, an employer will be required to notify the Commissioner if the evidence is not obtained within a reasonable time. [New paragraph 132A(2)(c)]

Section 2 - Retention period for keeping records

Summary of the amendments

Purpose of the amendments

9.45 These amendments will reduce the retention period under section 132 from seven years to five years for records that are relevant for ascertaining an employer's FBT liability.

Date of effect

9.46 This amendment will apply to assessments for the FBT year commencing on 1 April 1995. [Item 74 in Schedule 6]

Background to the legislation

9.47 An employer is required under section 132 of the FBTAA to keep records that identify and explain all transactions and acts relevant for the purpose of ascertaining the employer's FBT liability. The records must be retained for a period of 7 years after the completion of the transactions or acts to which they relate.

Explanation of the amendments

9.48 Section 132 will be amended to reduce the retention period for FBT records from 7 years to 5 years. [Items 30 and 31 in Schedule 6]