Thinking Tax Edition 4

Roelof van der Merwe

Thinking Tax is an initiative from Crowe to provide you with a short overview of specific tax issues that may affect you or your business, with a focus on practical issues you may face on a day to day basis.

1. Fringe Benefits Tax (FBT) consequences: work cars garaged at home during COVID-19

Using the statutory formula method to calculate car fringe benefits, an FBT liability will continue to arise if the car was garaged at an employee's home and is deemed to be available for the private use of the employee.

However, using the operating cost method to calculate car fringe benefits, no additional FBT liability will arise if the car was garaged at home or has only been driven briefly for maintenance purposes during COVID-19. To ensure no FBT is payable for such a car in that period, employers should maintain the required logbook and odometer records for the period to show the car was not driven during the period it was garaged.

Some logbook tips when calculating car fringe benefits using the operating cost method:

  • If the employer was already using the operating cost method and the employee was maintaining log books before COVID-19, the employer can still rely on the existing logbook, and take into account reasonable estimates of changes due to COVID-19;
  • If the driving patterns and business use percentage was impacted by COVID-19, the employer can choose to keep a new logbook that is representative of the employee’s usage throughout the FBT year, even if it is not a logbook year;
  • If it is the first time using the operating cost method, or it is a logbook year, the employer must:

    - Keep a logbook recording details of business journeys undertaken in the car for a continuous period of at least 12 weeks (the logbook period must also be recorded in the logbook).
    - Keep odometer records of the total kilometres travelled in the logbook period, and the total kilometres travelled during the year.
    - Estimate the number of kilometres travelled on business journeys during the FBT year.

If the logbook does not reflect a 12-week period, the employer cannot apply the logbook to reduce the taxable value to take business use into account.

2. Are you using the best structure to operate your business?

In changing circumstances such as COVID-19, businesses may want to change their business structure. A change in business structure such as changing from a sole trader to a company or changing from a trust to a partnership structure would usually give rise to Capital Gains Tax (CGT) consequences as a restructure typically involves the sale and transfer of assets (whether it be ownership interest of the entity or business assets of the entity).

However, taxpayers that can access rollover concessions can potentially defer the taxation of such a capital gain. There are CGT rollovers available for a whole range of business restructures – for example same-asset rollovers, replacement asset rollovers or small business restructure rollovers (i.e. restructure rollover available for small business entities with a turnover of less than $10 million).

It is also important to understand the finer nuances of each business structure because the structure you choose may affect:

  • Tax liability - companies are taxed at a flat rate of 26% (for the 2020/21 year) or 30%, whereas sole traders are taxed at progressive rates depending on their taxable income.
  • Asset protection - beneficiaries of discretionary trusts do not have an interest in the trust property and companies have limited liability.
  • Costs - it is more expensive operating through a company than operating as a sole trader.

Furthermore, each business structure has different characteristics. For example:

  • A company is a separate legal entity from a director or shareholder of that company.
  • A shareholder or director of a company cannot just use company assets for their personal use.
  • A trustee must hold trust property such as assets, investments and income for the benefit of the beneficiaries of the trust.

Please speak to your Crowe adviser about the advantages or disadvantages of changing your business structure in the time of COVID-19 or get in contact with the Tax Advisory team to find out more.

Roelof van der Merwe, National Tax Director (Melbourne)

John Baillie, Senior Partner, Tax Advisory (Melbourne)

Trevor Pascal, Senior Partner, Tax Advisory (Brisbane)