FTB and motor vehicles

The changes took effect from the 1st April 2006 although the legislation did not appear until the middle of March 2006!

This has left us with little or no time to prepare for these changes.

There are two fundamental changes in the way that FBT now applies to vehicles.  Firstly, 9 to 5 (or flip) leases no longer work. 

This means that from 1st April 2006 FBT will be payable on vehicles subject to 9 to 5 leases based on the original cost price of the vehicle.

Secondly, (and this is the good bit) the value of the fringe benefit has been reduced from 24% to 20% of the cost of the vehicle.

There is a third change whereby FBT can now be calculated based on the diminishing value of the vehicle. 

However, we have dismissed this option as it is actually more expensive from an FBT point of view unless the vehicle is going to be held for at least five years. 

In our experience, it is unusual for vehicles to be held this long.

Alternatives to 9 to 5 leasing

There are a number of options available to businesses which currently have 9 to 5 leases in place. 

These include the following:

   Do nothing and pay FBT on the vehicle.

   Charge the shareholders advance account with the value of the fringe benefit (rather than actually paying FBT).

   Change the ownership of the vehicle to an individual (or a partnership) and thus avoid FBT.

   Use Inland Revenue Department mileage rates to reimburse vehicle running costs.

Inland Revenue Department mileage rates

Using Inland Revenue Department mileage rates is not really a viable option as it is limited to 5,000 kms per annum. 

This limits the reimbursement to $2,240. 

The running costs of the vehicle are likely to be much higher than this.

Charging the shareholding advance account

Under this option, the amount of the fringe benefit is calculated at 20% of the cost price of the vehicle which is charged to the shareholders advance account. 

There is a corresponding reduction in the amount of vehicle expenses claimed for income tax purposes. 

The shareholder will need a large current account balance to offset this charge or will need a regular salary or dividend to be credited to this account to keep the balance positive.

The effect of this treatment is to switch the cost from an FBT liability to an income tax liability. 

There is no real benefit arising from this option.

Reimbursement of running costs

A company can only reimburse employees for actual costs incurred. 

Importantly, the reimbursement can only be for revenue items  not capital items.

This means that if a shareholder employee maintains a vehicle log and establishes the appropriate business percentage of running costs, the company can reimburse him for petrol, repairs, insurance and other expenses. 

These reimbursements will be deductible for income tax purposes. 

The disadvantage with the method however is that depreciation cannot be reimbursed as it is a capital cost.

There is however an important difference between an employee who leases a vehicle as opposed to a vehicle which is purchased outright or financed by hire purchase.

A company can reimburse the employee for the cost of leasing a vehicle as the lease is effectively a rental and is therefore a revenue item (as distinct from a capital cost).

It is important to note that the ability to reimburse the lease cost only applies to an operating lease as a finance lease is deemed to be a hire purchase arrangement.

Reimbursing the business usage of a leased vehicle appears to be the best option as it effectively achieves the same result as a 9 to 5 lease.

Possible advantage of paying fringe benefit tax

Although FBT is one of the most unpopular forms of taxation, paying FBT has become slightly more attractive. 

As I have already mentioned, the value of the fringe benefit is now based on 20% of the cost price of the vehicle.

In some circumstances, FBT can work in favour of the taxpayer. 

This is likely to be the case if one or more of the following apply:

If the vehicle has a low cost.

As FBT is calculated based on the cost price of the vehicle, the lower the cost, the lower the FBT exposure. 

A cheap vehicle is likely to consume the same amount of petrol as an expensive vehicle and therefore FBT works to the taxpayers advantage when the vehicle cost is low.

If the actual percentage of business running is low.

This can occur when a spouse of the business owner is employed for a few hours each week. 

The company can provide a vehicle to the spouse to perform the business duties and the vehicle can be available for private use the rest of the time. 

Although FBT will apply in these circumstances, the business will be able to claim 100% of the running and capital costs of the vehicle. 

GST would also be claimable on the purchase of the vehicle.

Assuming the vehicle would have otherwise been treated as a private vehicle and therefore no business expenses claimed, FBT will actually work in favour of the taxpayer.

Conclusion

There are numerous issues to be taken into account when considering the best way to treat vehicles under the new FBT regime. 

I recommend you seek tax advice to ensure that the ownership of your business vehicles is structured so that you minimise FBT and obtain the maximum income tax deduction.