Providing Cars to Employees - Tips & Traps

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Providing Cars to Employees - Tips & Traps

The provision of company cars to employees is a regular practice across the Australian business landscape. Generally, there are two reasons to provide a car to an employee:

  • It’s a requirement of the job that employees travel regularly for work purposes, so providing a car will allow employees to effectively perform their duties.
  • employers want to give themselves an advantage over their competitors being ‘employers of choice’, attracting the best and brightest, by converting non-deductible private vehicles to tax deductible company cars for their employees.

Granting employees’ access to company cars is treated by the ATO as a ‘non-cash benefit’, more commonly referred to as a fringe benefit.


Fringe benefits provided to employees and/or their associates are subject to Fringe Benefits Tax (FBT), which is currently set at a flat 47% of a benefit’s ‘taxable’.

With the tax rate for fringe benefits set at 47%, the obvious question is why would small business owners grant an employee access to a company car?

Considering that the great majority of Australian taxpayers are currently paying marginal tax rates of between 34.5% & 39% (current for the 2020 financial year and including the Medicare levy) it seems counter-intuitive to allow this. After all, this does translate to an additional 8% to 12.5% tax liability that could be avoided if the employee was simply given a pay rise.

The answer to this question lies in how the ‘taxable value’ of the fringe benefit (i.e. the car) is calculated. The taxable value of a car fringe benefit is meant to reflect an employee’s ‘private use’ of the vehicle, as only the private use of the car is subject to FBT. Additionally, the FBT law allows ‘employee contributions’ to reduce the taxable value of the car fringe benefit. 

If the taxable value of a car can be reduced to nil, then no FBT will be payable. As such, employers are inadvertently provided an avenue to provide employees with extra value without incurring additional expenses.


How does the ATO calculate the taxable value of a car fringe benefit?


Questions?

Give us a call on 03 5911 7000 or email reception@smartbusinesssolutions.com.au if you'd like help understanding what this means for you and your business. 

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