Motor vehicle expenditure of close companies
(Clauses 56, 58, 59, 60, 61, 63 and 64)
Summary of proposed amendment
The proposed amendment will extend the motor vehicle expenditure rules in subpart DE of the Income Tax Act 2007. Currently sole traders and partnerships can use these rules to measure the business use of a motor vehicle. The proportion of business use of a motor vehicle is used to calculate the amount of the deduction for motor vehicle expenditure. These rules are being extended to allow certain close companies to use these rules as an alternative to paying FBT on a motor vehicle benefit provided to shareholder-employees.
Currently close companies who provide a motor vehicle for the private use of shareholder-employees are required to register and pay FBT on the value of the benefit provided. The value is based on the availability of the motor vehicle rather than the actual private use by the shareholder-employee. This approach can result in compliance costs being higher then they need be for these close companies as they are required to register and pay FBT.
The proposed amendment allows certain close companies to elect to use the motor vehicle expenditure rules instead of paying FBT on the value of the benefit provided to shareholder-employees.
The amendment will apply for the 2017–18 and later income years.
The proposed amendment provides an alternative to FBT for certain close companies by inserting a new exclusion into section CX 17. Section CX 17 is the section in the FBT rules that deals with benefits provided to shareholder-employees. Under the proposed new exclusion, section CX 17 will not apply when the close company makes a motor vehicle available to a shareholder-employee for their private use and elects to apply subpart DE for the motor vehicle and the shareholder-employee. The election will apply only to new motor vehicle arrangements between close companies and shareholder-employees, and will continue to apply until the close company stops using the motor vehicle for business use or until the close company disposes of the motor vehicle.
The proposed amendment applies to close companies where the only fringe benefit provided is the provision of one or two motor vehicles to shareholder-employees for their private use. These close companies qualify for the close company FBT option in section RD 60 and consequently may be filing and paying FBT annually. If they elect to apply the proposed motor vehicle expenditure rules, the close company will not be required to account for FBT on the benefit provided to their shareholder-employees.
Under the proposed amendment, when a close company has made the appropriate election, it will apply the motor vehicle expenditure rules in subpart DE. Subpart DE provides methods for calculating the proportion of business use of a motor vehicle. This proportion forms the basis for the amount of motor vehicle expenditure that can be deducted. Section DE 1 is being amended to enable a close company who makes an election under section CX 17 to use the methods in subpart DE to measure the business use of the motor vehicle by its shareholder-employee. The close company will use the proportion of business use by the shareholder-employee to calculate the amount of their deduction for motor vehicle expenditure.
Section DE 2 is being amended to include interest on amounts used to fund, directly or indirectly, the business of a motor vehicle as part of the motor vehicle expenditure subject to the rules in subpart DE. This amendment applies only to close companies that have elected to use the motor vehicle rules in subpart DE and is needed because of the automatic interest deduction rules for companies in sections DB 7 and DB 8. These sections are also being amended consequentially.
When a close company uses this proposed new option and transfers the value of the private non-deductible portion of the motor vehicle expenditure to the shareholder-employee – for example, by debiting their shareholder current account, the value of the private use of the motor vehicle by the shareholder-employee will not be a dividend. Proposed changes to section CD 32 account for this.
In some circumstances a GST adjustment may be required to reflect any difference between the actual proportions of business and private use of the motor vehicle and the intended proportions of business and private use of the motor vehicle.
Mary is the controlling shareholder of Mary’s Home Interiors Ltd which has a 31 March balance date. Mary’s Home Interiors Ltd is a close company. Mary is the only employee of her company. On 1 April 2016, the company provides Mary with a new vehicle for both business and unlimited private use. During the 2017 income year, it is expected that Mary’s business use of the vehicle will be 60 percent and the total motor vehicle expenditure for the year is estimated to be $4,250. This includes an amount of interest on the loan that the company used to finance the cost of acquiring the new vehicle. The cost price of the vehicle was $20,000.
The company will have the choice of paying FBT on the availability for private use of the vehicle using the cost price of the vehicle as a basis and multiplying by 20% to get the value of the fringe benefit ($4,000) and pay FBT of $1,970.
Alternatively, the company could make an election under amended section CX 17(4B) to use the motor vehicle expenditure rules in subpart DE. The company could use the proportion of business use of the vehicle by Mary to apportion the motor vehicle expenditure. Mary maintains a logbook where she records details of her business use of the vehicle. This would result in the business not claiming 40 percent of the total motor vehicle expenditure of $4,250 ($1,700).
At end of the income year, a debit entry is made to Mary’s current account for the value of the motor vehicle expenditure that relates to Mary’s private use of the motor vehicle.
If the company uses the logbook records to estimate the percentage of intended use and actual use of the motor vehicle for GST purposes, no GST change of use adjustments should be required.
Close companies that provide their shareholder-employees with a motor vehicle for private use are required to register and pay FBT for that benefit, subject to certain exemptions. Sole traders and partners in a partnership who use a motor vehicle in a similar way are not required to register and pay FBT. Instead these taxpayers apportion their motor vehicle expenditure between business and private use under the motor vehicle expenditure rules in subpart DE. These differences in treatment for what is essentially the same benefit (the private use of a motor vehicle) arise because of the different entities involved. The proposed amendment provides an option for certain close companies to elect to have the same treatment as sole traders and partnerships.
Conceptually, denying deductions for private expenditure should have a comparable overall tax outcome for the shareholder-employees to allowing deductions and applying FBT to the value of the benefit, once attribution of profits is taken into account. This is why the proposed change will not apply to motor vehicle benefits provided to those who are just employees of close companies.