Fringe Benefit Tax Calculation for Close Companies
18 Jul 2017
Close companies that provide their shareholder-employees with a motor vehicle for private use are required to register and pay FBT on that benefit, with some exemptions. On the other hand, sole-traders and partners of a partnership who use a motor vehicle as part of their business are not required to register and pay FBT on that motor vehicle. Rather, they apportion expenditure incurred in relation to that vehicle between business and private use. The amounts relating to private use are not deductible for tax purposes.
This differing treatment for similar businesses arises purely because of the type of entity the business has chosen to trade through.
Close companies are required to calculate the availability of a vehicle for private use to work out the amount of FBT to pay. Often this is calculated on an annual basis as these taxpayers pay FBT annually. This creates an additional compliance burden when they are providing a single fringe benefit, when compared to similar businesses being run as a partnership or a sole trader.
The Government has announced that it will align the treatment of motor vehicles for these particular types of entities. This will remove the compliance costs incurred by a close company having to register for and pay FBT for no other reason than the provision of a motor vehicle to one or two shareholder-employees.
The rules for motor vehicle expenditure (only for new vehicles or first used vehicles in the 2017-18 year) for sole traders and partnerships will be extended to apply to close companies. This will be optional as there may be some close companies that are comfortable with the current treatment.
There are three methods for apportioning business and private use:
- Actual records - showing the reason and distance travelled for all business purposes;
- Logbook records – maintained for a test period of at least 90 days to establish the extent of business use. This can then provide the basis for determining the business use of the motor vehicle for a three year period; or
- Mileage rates – this method can only be used for less than 5,000 km of business travel - the actual business mileage is used multiplied by Inland Revenue mileage rates.
Mary’s Home Interiors Ltd is a close company and Mary is the controlling shareholder with a 31 March balance date. Mary is the only employee of her company (so a close company) and on 1 April 2017, the company provides Mary with a new vehicle for both business and unlimited private use.
During the 2018 income year, it is expected that Mary’s business use of the vehicle will be 60 percent and the total motor vehicle expenditure for the year is estimated to be $4,250. This includes an amount of interest on the loan that the company used to finance the cost of acquiring the new vehicle which was $20,000.
The company will have the choice of:
- Paying FBT on the availability for private use of the vehicle using the cost price of the vehicle as a basis and multiplying by 20% to get the value of the fringe benefit ($4,000) and pay FBT of $1,970.
- The company could make an election under tax amendment rules (section CX 17(4B)) to use the motor vehicle expenditure rules and therefore use the proportion of business use of the vehicle by Mary to apportion the motor vehicle expenditure.
Mary maintains a logbook where she records details of her business use of the vehicle. This would result in the business not claiming 40 percent of the total motor vehicle expenditure of $4,250 ($1,700).
At end of the income year, a debit entry is made to Mary’s current account for the value of the motor vehicle expenditure that relates to Mary’s private use of the motor vehicle.
If the company uses the logbook records to estimate the percentage of intended use and actual use of the motor vehicle for GST purposes, no GST change of use adjustments should be required.
If you need some assistance working out if your business qualifies under the new rules, and which option is best for you, please get in touch with us.