How to Choose the Right FBT Calculation Method for Your Business

The Impact on Your Business

The method you choose to calculate FBT can affect your FBT liability, your ability to claim deductions, and how much time you spend keeping records. For example, using the statutory formula method is straightforward and requires less paperwork, but it may not always give you the lowest taxable value. On the other hand, the operating cost method can lead to a lower taxable value if your vehicles are mostly used for business, but it does require more detailed record-keeping.

Choosing the right method also helps you avoid surprises at tax time. If you pick a method that doesn’t suit your business, you might end up paying more FBT than necessary or missing out on savings from employee contributions and business use.

What the ATO Expects

The ATO expects businesses to use an approved method for calculating FBT on car fringe benefits. You need to be able to show how you worked out the taxable value, keep records for each FBT year, and make sure your calculations are accurate. If you’re audited, having clear records and a logical method will make the process much smoother.

It’s also important to review your chosen method each tax year. Your business needs might change, and what worked last year may not be the best option now. Regular reviews help you stay compliant and make the most of any changes in your business or the FBT rules.

Key Factors to Consider

Before you settle on a method, think about the size of your business, the number of motor vehicles you provide, and how those vehicles are used. The main things to consider include:

• Business use vs. private use: If your vehicles are mainly used for work, you might benefit from the operating cost method.

• Record-keeping ability: If you don’t have the resources to keep detailed log books, the statutory formula method could be easier.

• Employee contributions: If employees make regular contributions to car expenses, this can reduce your FBT liability under any method.

Understanding these factors will help you choose a method that matches your needs and keeps your business running smoothly.

Solutions: Choosing and Applying the Right Method

Now that we’ve covered why your FBT calculation method matters, let’s explore the main methods available and how you can apply them in your business. We’ll also look at how you can make the process easier and avoid common mistakes.

Statutory Formula Method: The Easy Option

The statutory formula method is a popular choice for many businesses because it’s simple and requires less paperwork. Here’s how it works:

• You calculate the taxable value of the car fringe benefit using a fixed percentage (currently 20%) of the car’s cost price, which includes dealer delivery charges, customs duty, and luxury car tax, but excludes registration and stamp duty.

• The formula is: (Base value of the car × statutory percentage × number of days available for private use ÷ number of days in the FBT year) minus any employee contribution.

• This method doesn’t require a log book, so it’s ideal if you want to keep things simple and your vehicles are used for both business and private purposes.

Keep in mind, the statutory formula method applies to most company vehicles, but you need to check that your vehicle meets the ATO’s definition of a car for FBT purposes.

Operating Cost Method: For More Business Use

The operating cost method is best if your vehicles are mostly used for business and you’re able to keep detailed records. Here’s what you need to know:

• The taxable value is based on the total operating costs of the vehicle, multiplied by the percentage of private use, minus any employee contribution.

• Operating costs include fuel, oil costs, repairs, maintenance, insurance, and deemed depreciation and interest. You’ll need to keep receipts and calculate these costs for each vehicle.

• To work out the business and private use percentages, you must keep a log book for a continuous period of at least 12 weeks during the FBT year. The log book records every journey, its purpose, and odometer readings.

• This method can result in a lower taxable value if most trips are for business, but it does require more effort.

The operating cost formula gives you flexibility to reflect actual private use, which can lead to savings if your vehicles are not used much for personal trips.

Cents Per Kilometre Method: For Non-Car Vehicles

If your business provides motor vehicles that are not classified as cars (such as vans or utes designed to carry a load of less than one tonne), the cents per kilometre method may apply:

• You calculate FBT by multiplying the private kilometres travelled by the ATO’s set rate for the FBT year.

• This method is straightforward and doesn’t require you to track operating costs, but you must keep odometer records and show which trips were for private use.

• It’s especially useful if you reimburse employees for using their own car for work and want a simple way to calculate FBT.

Making the Most of Employee Contributions

No matter which method you choose, employee contributions can help reduce your FBT liability. If employees pay for part of the car expenses (such as fuel or maintenance) or make direct payments to the business, these amounts are deducted from the FBT benefit value on a dollar for dollar basis.

Make sure you keep records of such contributions and include them in your FBT calculations. This can be a simple way to lower your taxable value and save your business money.

Record-Keeping and Compliance Tips

Good record-keeping is essential for stress-free FBT compliance. Here are some practical tips to help you stay organised and avoid common pitfalls.

Keeping Track of Vehicle Costs and Use

• For the statutory formula method, keep all purchase documents showing the car’s cost price, including dealer delivery charges and any customs duty paid.

• For the operating cost method, keep receipts for all car expenses, including oil costs, repairs, and insurance. You’ll also need a valid log book for each vehicle.

• For the cents per kilometre method, make sure you have odometer readings and records of all private use trips.

Having these records ready makes it easier to calculate FBT, respond to any ATO queries, and claim deductions where possible.

Avoiding Common Mistakes

Some of the most common FBT mistakes include using the wrong method, forgetting to update logbooks, or missing employee contribution records. To avoid these issues:

• Review your FBT calculation method each year to make sure it still suits your business.

• Set reminders to update logbooks and collect all necessary receipts before the end of the FBT year.

• Double-check that employee contributions are recorded and deducted correctly from the FBT benefit value.

Using Technology to Make Things Easier

There are many digital tools and apps available to help you track vehicle use, record expenses, and store receipts. These can save you time, reduce errors, and make it easier to prepare your FBT return. Consider using an electronic log book or an online expense tracker to keep everything in one place.

Additional Insights: Reviewing and Improving Your FBT Approach

Choosing the right FBT calculation method isn’t a one-off task. As your business grows or changes, it’s worth reviewing your approach and looking for ways to improve.

When to Review Your Method

If you add new vehicles to your fleet cars or change how those vehicles are used, your current FBT statutory method for calculating the car benefit may no longer be the most cost-effective, especially if the level of personal use changes across your business. Adjustments in the number of vehicles or how they are allocated can affect the statutory fraction applied and may result in a different FBT taxable value for each car.

When you hire more staff or restructure your business, it’s important to review and update your record-keeping systems. You may need to consider whether different calculation methods are more suitable for certain vehicles, particularly if some are used mainly for business and others for personal use. This ensures your FBT reporting remains accurate and aligns with your business’s actual operations.

If the Australian Taxation Office updates the statutory rate, operating cost rules, or cents per kilometre rate, it’s essential to review your FBT calculations. These changes can influence the FBT taxable value and may also affect how the marginal personal tax rate interacts with employee contributions or benefits. Regularly reviewing your approach helps your business stay compliant and take advantage of any new opportunities to manage your FBT obligations effectively.

Getting Professional Support

If you’re unsure about which method to use or how to keep the right records, it’s a good idea to get advice from a professional accountant. Our team is here to help you understand FBT law, choose the right method, and set up systems that make compliance easier. We can also help you with journal entries, lease back arrangements, and any questions about FBT tax valuation or business premises use.

Building Internal Capability

Empowering your staff with training on FBT rules and record-keeping can help you stay on top of compliance and avoid last-minute stress. Regular reviews and updates to your processes will keep your business on track and ready for any changes in the FBT year.