Can employees use their old logbook to prove business percentage use under the operating cost method in calculating the car fringe benefits tax? Also includes

how to actually deal with clients regarding this issue
whether checking reasonableness of business percentages is part of your scope of work, and reasonable care?
how to cover your ass!

You may wish to watch our FBT and Cars - Practical Basics here before watching this.

Relevant external links:

COVID-19 and cars factsheet
FBT tax gap

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TRANSCRIPT

1. The question

So it's FBT season and you're kicking off an FBT return for a client of yours. And they've given you their work papers for calculating the car fringe benefits tax, and in the spreadsheet given to you, you see, you know, a lot of cars using the statutory formula method, which is great. But you can see that a handful of cars are going to be applying the operating cost method because they've given you the business percentage use of the cars, which are around like, 80 to 90%, but you can see that they are the same as the prior year, as if you know COVID hasn't happened. And you can see that they are still relying on the same log books as the prior FBT year.

My question to you is what do you do?

Do you rely on the client's business percentage use that has been given, or do you question them and ensure that, you know, those business percentages are reasonable? That's the next topic of our video? We will explore that question a little bit further, and I'll give you some practical tips on how to tackle this hairy issue, but also explore what guidance is out there from the ATO to help you navigate this challenging situation.

2. House-keeping / best practice

So before I give you the actual answer, let's do a bit of housekeeping, right? So first of all, you need to ask yourself, is this a normal car or is it like a Ute type of car, which is not a car at all? Because you, they can sometimes be completely exempt from FBT which requires a different set of conditions to be met. So make sure that, you know, you're looking at cars and not utes and I'll cover utes off in a separate video, but let's say it is a car so that it is subject to FBT or it's a ute that is not exempt for FBT. And so you need to calculate FBT on it. So the next thing that you should do is to work out what's the FBT or the taxable value of the car under the statutory formula method. And I'm talking about the cars that the client has given you the business percentage is of and want to use the op cost method.

And I find this is something that sometimes people forget to do, they immediately jump to the operating cost method without calculating what the taxable value would be under the stat method, because that could potentially provide a lower FBT payable. So make sure you don't forget to calculate both and make sure that you use the method that gives you the lowest FBT payablei.e. Lowest taxable value.

3. Logbooks and COVID guidance

Well, what you need to do is to check out the Tax Offices a new fact sheet called COVID 19 and cars. So let's bring it up here together. There you go. It's a three page document and scroll to the second page at the bottom here, which says if COVID 19 has impacted driving patterns and you already have an existing log book.

And what does it say here? They said, okay, so you're using the op cost method and you have an existing log book in place. You can still rely on this log book, despite changes in the driving patterns due to COVID-19, et cetera. You must keep a odometer records of the year. That's good. And then you need to make a reasonable estimate of the percentage of business use or the car taking into account log books or odometer records and any changes in the pattern of business use throughout the year, including changes during COVID 19.

So I think the bottom line here is the ATO saying that you don't need a new log book, but you need to take into account the log book, the odometer records, as in the new domino records and changes to the employees driving behavior slash pattern during COVID. And, and I guess this is a common sense approach.

So imagine you have an employee that's, you know, their odometer records shows that she's driven 5,000 kilometers. I don't know. I just made that up. And then she hasn't travel at all for work. Cause she's been just working from home throughout the entire FBT period from one April, 2020, when the lockdown kind of began all the way up to 31st, March, 2021, but she's driven 5,000 kilometers. So then, you know, that should be private in nature. And so her business percentage would be very low. And so you would then be a bit more skeptical in terms of, is that business percentage actually reasonable, right?

Compared this to an employee who has driven also 5,000 kilometers. But she has been, you know, back to the office and seeing clients from say January onwards. And so she's been using the car for like three months of a year. And when you compare that to the kilometers in the prior year, it kind of makes sense that it is all business use. And so you'd be more comfortable using a business percentage of, you know, 80, 90, a hundred percent for that particular scenario.

4. Information gathering and substantiation tips

So that's all good in theory, but you know, practically, how do you work out that employee's behavior? Is this something that you talk to your clients about and educate them about, or do you just accept what the client has given to you? That's the tricky bit getting the balance, right between how many questions you should be asking the clients versus just accepting what the client has given to you, and then also ensuring that you've exercised, you know, sufficient, reasonable care as a tax agent to ensure that the client's tax return, FBT return that is, is correct. And that they're paying the right amount of FBT. So look, I think, first of all, is you got to ask yourself, is this part of the scope of your engagement that is, is checking the business percentage use of their employees? Is that part of the scope? And if the answer is no, then great.

But I think that if, if you were to scope it out, you want to make sure that it is black and white clear in the engagement letter of the FBT return. Or, or / and preferably, but, but if it's not an engagement letter, you would want to make sure that it is explicit in black and white in the letter that goes with the FBT return when it goes to the client in final.

But of course, you know, make sure you have a conversation with the client so that they are aware that it's, it's going to be in the letter before you issue it to them. Just that, so that they're not surprised by it.

But let's say it is part of the scope of your engagement. The client expects you to do it as in the client expects you to check whether the business percentage is reasonable or not. And so this is a part where you have to ask some questions, right? And so how do you go about doing that?

Well, you'd want to put as much of the burden of proof with the client themselves. So, and, and, and you know, use a common sense approach, right? So, so the first thing you should ask is, Hey, how have you worked out the business percentages of these operating costs type cars in general, and then get the client to explain the methodology to you and work out if that's reasonable or not.

And if it's reasonable or good, make sure you keep that email or you write a note of the client's methodology down and keep that with the file, with the FBT return files so that, you know, you basically cover your ass, right?

The client hasn't used any type of common sense approach and they've just relied on last year and haven't even asked the employee any questions, that's when you have to, you know, educate the client and get them to ask the employees. And then you don't, they might shoot you a few emails from the employees, confirming their driving behavior.

And you know, you, you make a note of that and you keep it also with the tax return of file. Look. It's it's messy, but at the end of the day, you need to cover yourself and make sure that you have something in writing, even if it's just handwritten notes, right in your tax return file in the event that you do ever get audited.

By the tax office FBT is one of the largest tax gaps in the tax office. So I'll drop a comment in there to show you where I got that it's like a $1 billion in terms of tax gap. Looking at the estimated tax gap, I wouldn't be surprised if it is going to be an area of audit focus in the future.

You want to make sure that you have sufficient evidence to show that you have, you know, done your duty of care to make sure that the business percentages are reasonable. Yeah, it's all about being able to substantiate it so that, you know, when the ATO case officer picks up the file, they can actually see that there is some sort of evidence of that business percentages.

5. Closing remarks and what's next

So hopefully that's given you some practical tips on how to navigate these sort of gray areas. And FBT is all about substantiation, record keeping, unfortunately. And I hope you found this useful. So the next few videos are all around FBT. So the next one we're going to tackle is. Whether the car is available for private use, if you're using the statutory method. And then we're going to cover off on car parking and COVID, you know, the car parks close as a car park in a shopping center, next door is closed. All those sorts of fun issues. And of course, you know, how do you substantiate it?

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