FBT on practice vehicles

Providing a car to a doctor or staff member is common in medical practices, and it triggers fringe benefits tax unless the arrangement is structured with the rules in mind. FBT is charged at 47% of the grossed-up value of the benefit, and for most employer-provided cars, the statutory formula method decides what that value is.

How the statutory formula works

Taxable value equals the cost of the car, GST-inclusive, multiplied by the statutory fraction and by the proportion of the year the car was available, less any employee contribution. The fraction is 20%, and since 1 April 2023 it has applied at 20% for every distance band.

That change matters because it removed distance from the calculation entirely. Before 1 April 2023 the fraction fell as the car was driven further, so a car driven under 15,000 kilometres carried a higher taxable value than the same car driven over 40,000, under bands of 0.26, 0.20, 0.11 and 0.06. Driving further no longer reduces the FBT payable, and the calculation now runs on the original cost of the car, not its depreciated value or its running costs. A cheaper car driven hard and an expensive car driven rarely are not treated the same way; the expensive one still carries the higher taxable value.

Statutory formula versus operating cost

The statutory formula method ignores actual running costs altogether. The operating cost method instead takes the car's total running costs and applies the business-use percentage, which requires a logbook and records of every running cost kept through the year.

The operating cost method can produce a lower taxable value for a low-kilometre or efficient car, or where business use is high. It is more work to substantiate, but the method can be chosen fresh each year, so it is worth checking both before settling on one for a given car and year.

Employee contributions, and the source that matters

Where an employee contributes towards the cost of the car, either by paying running costs directly or making a post-tax contribution, that amount reduces the taxable value dollar for dollar. The contribution has to come from after-tax income to count. Salary sacrificing the contribution does not reduce the taxable value, because the arrangement has not actually put after-tax money into the cost of the car.

GST and the two gross-up rates

The taxable value is grossed up before the 47% rate applies, and which gross-up factor is used depends on whether the employer can claim GST credits on the car's costs. Type 1 applies where credits are available and uses a factor of 2.0802; Type 2 applies where they are not and uses 1.8868. The difference is material, not cosmetic: the same taxable value produces roughly 10% more FBT under Type 1. A practice that is not registered for GST, or that provides the car through an entity that cannot claim the credits, sits on the lower factor.

The FBT year is not the financial year

Fringe benefits tax runs from 1 April to 31 March, not 1 July to 30 June. A car provided in May falls in the FBT year that began the previous April, a different period from the income year the practice otherwise reports on. FBT returns are generally due on 21 May for the year ended 31 March, or 25 June where lodged through a registered tax agent, and the 47% rate itself is fixed rather than indexed: it has applied since 1 April 2017.

Keep the invoice showing the car's cost, the dates it was available to the employee and the dates it was not, and any declaration the employee signs about private use or contributions. For the operating cost method, keep the logbook and running cost records as well. An employee contribution only counts if it is documented and actually paid; a contribution that appears in the arrangement but never leaves the employee's pay is not a contribution for FBT purposes.

What to do next

Use the FBT Car Benefit calculator to work out the taxable value and the FBT payable on a specific car under the statutory formula method, including the effect of an employee contribution and the correct GST gross-up rate for your practice. Where a car is driven mostly for business and the statutory formula is producing an unexpectedly high figure, model the operating cost method with a logbook before assuming the statutory formula is the cheaper choice.