FBT
Operating cost method
The operating cost method values a car fringe benefit using the car's actual running costs for the year, reduced by the business-use percentage shown in a logbook.
The operating cost method is the alternative to the statutory formula for valuing a car fringe benefit. Instead of using the car's price, it starts with the actual costs of operating the car during the FBT year, such as fuel, registration, insurance, repairs, servicing, tyres and a deemed amount for depreciation and interest or lease costs. The total is then reduced by the percentage of business use, which must be supported by a valid logbook, and by any employee contributions.
The business-use percentage is the key to the method. It is determined from a logbook, which records the journeys taken over a continuous period of at least 12 weeks, together with odometer readings at the start and end of the year. If the logbook covers a representative period, it can be used for up to five FBT years, subject to conditions. If the car is used mainly for business, the taxable value can be much lower than under the statutory formula.
The method requires good records. The employer needs invoices for the expenses, the logbook, odometer readings and, where the employee pays something towards the car, evidence of the contributions. If the records are missing or incomplete, the ATO can disallow the method or estimate the taxable value, usually to the employer's disadvantage. Many employers therefore use software or apps to keep logbook records.
When working out the operating costs, the employer includes GST on the costs only to the extent that credits are not claimed. Where the employer claims GST credits on the running costs, the cost excludes the GST amount, and the higher gross-up rate applies to the benefit for the FBT calculation. A consistent approach to credits is needed to avoid errors across the BAS and the FBT return.
The method suits employers who can document high business use. It is generally not beneficial where the car is used mostly for private purposes, because the taxable value would be near the full cost of operating the car. The employer can choose a different method for each car for each FBT year, so a comparison is worthwhile.
A common mistake is to guess the business-use percentage or to keep a logbook for a period that is too short. Another is to use a logbook after the vehicle's use pattern has changed substantially. A new logbook is needed in that case.
This is general information only, so confirm your records and method with the ATO or a registered tax professional.
Worked example
A car's total operating costs for the FBT year are $9,000. A valid logbook shows 70% business use, so private use is 30%. The taxable value is $9,000 x 30% = $2,700. If the employee pays $500 of the running costs from after-tax pay, the taxable value falls to $2,200 before gross-up. Under the statutory formula, the value might have been much higher.
Practical tips
- Keep a logbook for a continuous 12 weeks and record every trip, then use it to support your business-use percentage.
- Take an odometer reading on 1 April and 31 March each year, and keep all expense invoices.
- Compare both methods before the end of the FBT year, since you can choose per car per year.