Fringe benefits tax on cars in Australia, explained

Fringe benefits tax is a tax your employer pays, on a benefit you receive. That sentence explains most of what confuses people about it. You are not assessed on a car fringe benefit in your tax return, you do not pay the 47% yourself, and yet the arrangement can still cost you money in three separate ways — through a salary package that passes the FBT back to you, through a post-tax contribution, and through a figure on your income statement that you are not taxed on but that quietly reduces a list of government payments.

What fringe benefits tax actually is

FBT is imposed by the Fringe Benefits Tax Assessment Act 1986 on employers, on the value of non-cash benefits they provide to employees and their associates. It is separate from income tax, it has its own year, and it is assessed on the employer even when the benefit is something you chose.

A car fringe benefit arises when a car the employer holds — owned or leased — is made available for an employee's private use. Available is doing the work in that sentence: a car garaged at the employee's home is available for private use whether or not anyone drives it privately that day.

"Car" has a specific meaning here. It is a vehicle designed to carry a load of less than one tonne and fewer than nine passengers including the driver. A motorcycle is not a car, and neither is a vehicle over that load limit — which is why the ute rules further down are a separate regime rather than a discount.

The rate, and why the taxable value is not the tax

The taxable value of a benefit is grossed up before the 47% is applied, so that the employer ends up in roughly the position it would have been in had it paid the employee enough salary to buy the benefit from after-tax income. Type 1 applies where the employer can claim a GST credit on the benefit; Type 2 where it cannot. The figures are on the ATO's FBT rates and thresholds page, which is the one to check each year.

The practical consequence: a car with a taxable value of $7,000 is not a $3,290 problem. Grossed up at 2.0802 and taxed at 47%, it is closer to $6,844 of FBT. That is the number a salary packaging quote is built around, and it is why reducing the taxable value matters so much.

Two ways to work out the taxable value

You can use either method, for any or all of the employer's cars, and the choice can change from year to year. You do not tell the ATO which one you used — the business records show it — but the choice has to be made by the day the FBT return is due, or by 21 May if no return is required.

Statutory formula. The taxable value is (A × B × C ÷ D) − E, where:

• A is the base value of the car: the cost price paid by the employer or lessor, excluding registration and stamp duty, after any trade-in or cash payment by the employee, plus fitted non-business accessories, dealer delivery charges, GST and luxury car tax
• B is the statutory percentage, a flat 20% for anything arranged since 1 April 2014
• C is the number of days the car was used or available for private use
• D is the number of days in the FBT year
• E is the employee contribution

Operating cost. Actual running costs apportioned by the private-use percentage from a logbook. It needs logbook and odometer records — and without them you are not permitted to choose it. Where a car does high business kilometres this method usually produces a much lower value than a flat 20% of cost; where a car mostly sits in a driveway, it produces a higher one.

Employers running twenty or more cars have a simplified option under PCG 2016/10. The method detail and the ATO's own calculator sit on its page for the taxable value of a car fringe benefit.

The reportable amount, which is the part that reaches you

If the taxable value of your reportable fringe benefits exceeds $2,000 in an FBT year, a grossed-up figure goes on your income statement. It is grossed up at the lower rate (1.8868) whatever the benefit type, which is why a $2,000.01 taxable value produces a reported $3,773.

You are not taxed on that amount directly. It is used to work out:

• Medicare levy surcharge liability — the surcharge, not the ordinary levy
• Compulsory HELP, VSL, SFSS and apprenticeship loan repayments
• Family Tax Benefit Part A and Part B, and Child Care Subsidy
• Child support obligations
• Division 293 tax, the super co-contribution, and the private health insurance rebate

For someone carrying a study debt with children in care, that list can claw back a meaningful share of what a packaged car appeared to save. It is worth modelling against your own circumstances before you sign, not after.

Employee contributions reduce it, sometimes to nothing

E in the statutory formula is money you pay towards the running of the car out of post-tax income. It reduces the taxable value dollar for dollar, and taking it far enough reduces the taxable value to nil — which also takes the reportable amount to nil.

The ATO's own worked example on salary sacrificing for employees runs the three cases side by side for someone earning $65,000. Packaging a car with no employee contribution takes taxable income to $47,647 and puts a reportable fringe benefits amount of $13,207.60 on the income statement — a $7,000 taxable value grossed up at 1.8868. Packaging the same car with employee contributions takes taxable income to $60,855 and the reportable amount to nil.

Neither is automatically better. The first keeps more money out of taxable income; the second keeps the income statement clean. Which one wins depends on your marginal rate and on how exposed you are to the payments in the list above. This is the single most useful question to put to a salary packaging provider, and it is covered in more detail in our guide to novated leases.

Utes, vans and other eligible vehicles

There is a separate exemption where an employee's private use of an eligible commercial vehicle is limited. The vehicle has to be one of the ATO's eligible vehicles: a single cab ute, a panel or goods van, a taxi, a modified vehicle such as a hearse, or a dual cab ute or four-wheel drive that carries a load of one tonne or more, carries more than eight passengers, or is not designed principally to carry passengers.

Load-carrying capacity is gross vehicle mass minus unladen kerb weight. That calculation is why two utes in the same car park can be treated differently, and why a canopy or a set of accessories can move a vehicle across the line.

The private use has to be limited to travel between home and work, travel incidental to work duties, and non-work use that is minor, infrequent and irregular. PCG 2018/3 sets out when the Commissioner will not look behind that, and its conditions are specific:

• the vehicle is an eligible vehicle, provided to a current employee for business use
• its GST-inclusive value was below the luxury car tax threshold when it was acquired
• it is not provided as part of a salary packaging arrangement, and the employee cannot take extra pay instead
• there is a policy limiting private use, and the employee gives assurance they have followed it
• total private travel is no more than 1,000 km in the FBT year, with no single return journey over 200 km
• any diversion on the home-to-work trip adds no more than 2 km

The guideline's own example is a weekly football training run that adds more than two kilometres to the trip home. That is not a diversion, because the purpose of the journey was the training — so it counts as private travel, and once the total passes 1,000 km the employer cannot rely on the guideline at all.

Other thresholds worth knowing

The benchmark interest rate matters if your employer lends you money — including as part of a car arrangement. A loan below that rate is itself a fringe benefit.

Where to check before you act

FBT is one of the areas where a small factual difference changes the answer completely: a day either side of 1 April, a hundred kilograms of load capacity, whether a contribution was made pre-tax or post-tax. Start at the ATO's FBT on cars, other vehicles, parking and tolls section, and put the specifics of your own arrangement to a registered tax agent.

Electric cars are treated differently again, and the treatment is changing — see our guide to electric cars and fringe benefits tax. If you are buying through a business rather than being provided a car, buying a car through your business covers the GST and deduction side.