A costly blow is expected to be delivered to both businesses and employees as fringe benefits tax (FBT) administration on cars becomes more cumbersome and tax savings are threatened, according to leading accounting and advisory firm Grant Thornton Australia.

The government has announced this morning that the fringe benefits tax (FBT) statutory formula method is to be abolished for all new contracts entered into from today.  This means that only the log book (operating cost) method will continue to be available to calculate fringe benefits tax.

Grant Thornton’s Fringe Benefits Tax specialist, Elizabeth Lucas explains: “The log book method requires an employer to track the costs relating to each car, and to estimate the business use percentage of the car using employee completed log books. FBT is then payable on the private portion of the costs.”

“This is a major additional administrative burden compared to the previous statutory formula method. It will also mean a higher FBT impost for many employers,” says Lucas.

Whilst the extra administration cost has been worthwhile in the past for some employers with very high business car use, the extra administration will now be imposed on all employers, even where it will result in a higher FBT cost.

Speaking in Townsville this morning, Treasurer Chris Bowen said the use of technology such as iPhones means that completing a log book is easier these days. However, Lucas argues that it’s the description of the business reason for the trip where employees traditionally fall down and risk the log book being invalid.

With no valid log book, presumably the full running costs of the car will be subject to FBT. The types of costs required to be tracked for each car include fuel, insurance, registration, servicing, repairs and lease payments. For owned cars, depreciation and an imputed interest amount must be calculated.

“A particular difficulty is likely to arise for car dealers in determining the taxable value of their demonstration stock cars – both in relation to the costs related to the cars and the maintenance of appropriate log books,” says Lucas.

Employees who salary package cars will also be severely impacted. The tax savings from packaging cars have traditionally come through use of the statutory formula method. These savings will be eliminated, with potentially only minimal tax savings available from GST credits or associate lease cars.

“Legislation for these changes will obviously need to be passed before they become effective. However, with the government announcing today as the effective date for the changes, this puts all new car salary packaging arrangements on indefinite hold,” explains Lucas.