Accounting and Tax

Are you thinking of replacing your work vehicle?

22 March 2019
3 min read

Among the changes included in the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill, is an amendment that allows close companies to elect to apportion expenditure on motor vehicles the company provides to shareholder-employees between business use and private use, as an alternative to paying fringe benefit tax (FBT) on the motor vehicle. This change will mean that close companies can treat the expenditure on such motor vehicles in the same way as sole traders and partners in partnerships treat the expenditure on motor vehicles used for business and private purposes. Where the provision of a motor vehicle to a shareholder-employee is the only fringe benefit the company provides, electing this new method for accounting for the vehicle will remove the need to register for and file FBT returns.

Currently, a close company that makes a motor vehicle available to a shareholder-employee for the shareholder-employee’s private use is required to register for and pay FBT on that benefit. The flipside of this is that expenditure relating to the motor vehicle, including depreciation, is fully deductible to the company as the cost of providing a fringe benefit. By contrast, sole traders and partners in a partnership that have a motor vehicle available for private use are not required to register for and pay FBT. Instead, sole traders and partners apportion their motor vehicle expenditure between business and private use under the motor vehicle expenditure rules in the tax legislation.

The amendment provides close companies with the ability to elect to apportion the expenditure on a motor vehicle provided to a shareholder-employee between private use and business use. Where a close company makes this election no fringe benefit will arise in relation to the provision of the motor vehicle to the shareholder-employee. This election is only available for motor vehicles provided to shareholder-employees. FBT will continue to apply if a close company provides a motor vehicle to an employee who is not a shareholder.

The company must make the election to apportion the motor vehicle expenditure in the income year in which the company acquires the motor vehicle or first starts using the motor vehicle in its business. This means that close companies that are already paying FBT on vehicles provided to shareholder-employees must continue to do so. They will only be able to elect apportionment of expenditure over FBT when they replace the existing vehicle.

This new rule only applies to motor vehicles acquired or first used for business on or after 1 April 2017. So, if you are currently looking at replacing your motor vehicle and think that apportioning expenditure may be preferable to registering for and paying FBT, you may wish to consider delaying your purchase so you can take advantage of this new option.

Before making that decision, you should talk to your Findex adviser about which is the better option for you.