Vehicle’s ‘private use’ for FBT gets some wriggle room — up to a point

The ATO has made a change to the FBT rules, set to take affect for the 2019 FBT year and beyond, that will give businesses that supply employees with motor vehicles (that are not cars) a prescriptive method to apply to get an exemption to FBT. It is a change from the objective test that has been in place.

Generally, a fringe benefit arises where an employer makes a vehicle they hold available for the private use of an employee. Under the car-related exemptions of the FBT rules, a fringe benefit is an exempt benefit where the private use of vehicles is limited to work-related travel and other private use that is “minor, infrequent and irregular”.

The ATO’s practical compliance guideline on the matter says there has been demonstrated inconsistency in the application of exemptions, leading to additional compliance costs, especially where private travel is relatively low.

“To reduce these compliance costs and provide certainty, this draft guideline explains when the Commissioner will not apply compliance resources to determine if private use of the vehicle was limited for the purposes of the car-related exemptions,” the PCG says.

The relevant part of the new guidelines state that an employee uses a vehicle to travel between their home and their place of work “and any diversion adds no more than two kilometres to the ordinary length of that trip”. Also that “for journeys undertaken for a wholly private purpose (other than travel between home and place of work), the employee does not use the vehicle to travel more than 1,000 kilometres in total, and a return journey that exceeds 200 kilometres”.

Australasian Fleet Management Association (AFMA) executive director Mace Hartley says the change isn’t all that drastic, just new and more defined. “The rules have always been there, people have just taken a very liberal view of the law, whereas this tightens it up. Companies will have to start monitoring what personal usage looks like,” he says. “The draft ruling provides something you can adopt for clarity as a business, but you have to understand what kilometres your staff are using if you’re going to rely on it.”

Hartley says keeping track of vehicle use was something of a thorn in the side of fleet managers before the advent of digital in-vehicle logging systems, known as telematics. “At the very least, this will mean an employee declaration. The next step would be a logbook or telematics systems which would provide added benefits to the business as well as meeting those FBT personal usage compliance,” he says.

Hartley says considering telematics technology has just assumed greater importance. “The problem with FBT is the ATO can pick up something in the future and backdate penalties,” he says. “The guideline has been issued to help businesses know better what minor and infrequent usage is, but in making it more specific, businesses need to make sure they comply.”

He says old paper-based methods of record keeping can be susceptible to human error and, at the very least, employees will be held more accountable for their use of company vehicles by the company. “They either need a logbook, which nobody does accurately and they’re flawed, or they need to sign a declaration saying they won’t go over the restrictions,” Hartley says.

The ATO’s clarity will also test company policies. “There’s no point putting policies in place and letting them sit in a drawer – they’ll need to test the veracity of them. The guideline presents some potential opportunities and clarity for businesses, but they’ll have to review and determine how people have done their mileage.”

He says the definitions have long been murky and that has led to both the popularity of dual-cabs and the increase in personal use. “If someone’s doing 50,000 work kilometres a year, the school drop-off each day certainly fails the ‘infrequent’ definition but by percentage it might be okay on the ‘minor’ definition. It’s grey,” he says.

“It might make a situation where even more dual-cabs like the Hilux are sold, rather than single-cab – because they’re both FBT exempt but you can’t take the family in the single-cab, and it also makes sense that more than two employees may need to be driven around.”

Treasury floats idea of SMSF trustees self-assessing eligibility for 3-year audit

A discussion paper was issued by Treasury in the first week of July, titled “Three year audit cycle for some self-managed superannuation funds”. Among the more contentious proposals was that trustees should be able to self-assess their eligibility to conduct audits every three years, as opposed to the current standard of a yearly audit.

The basis for eligibility will depend, the discussion paper states, on funds toeing a yet-to-be determined line on good record keeping and compliance, which would include timely lodgement of SMSF annual reports (SARs) and three consecutive years of clear audit reports. An audit will be required however in a year in which a “key event” occurs, which would include starting a pension or an LRBA, the addition or removal of a member, transactions with a related party or receipt of non-arm’s length income.

Timely SAR lodgement however is something that is yet to be determined, with the Treasury paper flagging range of options for what constitutes “timely”. These being:

never submitted a late SAR
no late SAR in last three years
no outstanding SARs.

The final definition could however have quite an influential outcome on eligibility, as data the ATO holds indicates that about 40% of trustees have submitted a late SAR on at least one occasion in the three income years of 2013-14 to 2015-16.

The 3-year audit option is planned to be open from 1 July 2019.

The paper has also been issued as a method to gauge reactions from the marketplace. As a tool in the consultation process, the paper posits the following questions:

How are audit costs and fees expected to change for SMSF trustees that move to three-yearly audit cycles?
Do you consider an alternative definition of ‘clear audit reports’ should be adopted? Why?
What is the most appropriate definition of timely submission of a SAR? Why?
What should be considered a key event for a SMSF that would trigger the need for an audit report in that year? Which events present the most significant compliance risks?
Should arrangements be put in place to manage transition to three-yearly audits for some SMSFs? If so, what metric should be used to stagger the introduction of the measure?
Are there any other issues that should be considered in policy development?

Interested SMSF trustees/members are invited to respond to Superannuation@treasury.gov.au before the end of August.

ATO announces changes to how penalty relief is applied

From 1 July 2018 the ATO says it will not apply penalties to tax returns and activity statements where you have made an inadvertent error by failing to take reasonable care or due to the fact that you have not taken a “reasonably arguable” position (more below).

It says that if it finds inadvertent errors in your tax return or activity statement, it will fix the error and contact the taxpayer (or the tax agent who lodged) to make sure the taxpayer is informed about how to get it right next time.

The ATO says its penalty relief applies to eligible individuals as well as entities with a turnover of less than $10 million. These entities can be:

small businesses
SMSFs
strata title bodies
not-for-profit organisations
co-operatives.

Those not eligible for penalty relief include:

wealthy individuals and their businesses
associates of wealthy individuals that may be classified as a small business entity in their own right
entities that do not meet the small business entity eligibility criteria
public groups, significant global entities and associates.

The ATO points out that no-one can apply for penalty relief — it will provide this during an audit if clients are eligible. If the ATO audits you for periods earlier than 1 July 2018, it says it will also apply penalty relief for those periods.

Relief from penalties also comes with a “reset” period, which means penalty relief will be available once every three years at most. Penalty relief is not available for example where, in the past three years, you have:

had penalty relief applied
been penalised for reckless or intentional disregard of the law
evaded tax or committed fraud
been involved in the control or management of another entity that has evaded tax
incurred debts without the intention of being able to pay, such as with phoenix activity.

Penalty relief does not apply to other taxes such as fringe benefits tax (FBT) or the super guarantee (SG).

What is a reasonably arguable position?
The process for determining whether a position is “reasonably arguable” is explained to some degree in miscellaneous taxation ruling MT 2008/2. The ATO, in taxation ruling TR 94/5, states that: “Whether the taxpayer’s treatment was reasonably arguable would depend on its relative strength when compared with the Commissioner’s and other possible treatments. In other words, taxpayers should take particular note of the Commissioner’s views on the correct operation of the law as expressed in a public ruling, but may adopt alternative treatments provided there are sound reasons for doing so.”

A Treasury review of income tax self assessment found that “reasonably arguable” is only defined in general terms. This includes that “a position is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that it is at least as likely to be correct as incorrect”.

The explanatory memorandum to the A New Tax System (Tax Administration) Act (No. 2) 2000 explains this concept further as follows: “The position must be a contentious area of the law, where the relevant law is unsettled or where, although the principles of the law are settled, there is a serious question about the application of those principles to the circumstances of the particular case.”

The EM further states that: “The strength of the taxpayer’s argument should be sufficient to support a reasonable expectation that the taxpayer could win in court. The taxpayer’s argument should be cogent, well-grounded and considerable in its persuasiveness.