Including a car in a salary package is a popular remuneration arrangement, and doing so as part of a salary sacrifice package will often give rise the a “novated lease”.  Costs in operating the vehicle can also be salary sacrificed.  This is typically referred to a fully novated lease.

A novated lease arrangement is a popular way that employers can reward and incentivise employees. Under the right circumstances, employees can reduce their personal tax liability under a salary sacrifice arrangement involving a novated lease.

A novated lease is a three-way deal – between an employee, a financier, and the employer. The employee owns the car, and the employer agrees to make lease repayments to the financier plus pay for any running costs for that car as a condition of employment.

Under such an arrangement, the employer takes over all or part of the lessee’s rights and obligations under the lease of the employee’s car. This transfer of rights and obligations is agreed to in a “deed of novation” between the employer, the finance company and the employee (lessee). The lease obligation typically reverts to the employee upon cessation of their employment.

Under a novated lease, apart from paying for the car lease repayments, the employer would usually pay for the car’s running costs, such as fuel, maintenance, registration and car insurance. For example, some employees are given a fuel card to help pay for petrol.

Is FBT involved?
A car fringe benefit arises under a full novated lease arrangement. The employer is required to determine any FBT liability using the statutory formula method as the default, or alternatively elect to use the log book method.

As FBT is generally borne by the employee as part of their salary package, FBT can be reduced by the employee making after-tax contributions towards the running costs. This is referred to as the employee contributions method.

To reduce the FBT payable on the benefit, the running costs will be paid by the employer company from a combination of an employee’s pre-tax and post-tax income under the salary sacrifice arrangement.

Are after-tax running costs deductible?
A question commonly asked by practitioners is whether the running costs incurred by the employee from their after-tax income are deductible to the employee in their personal return.

And if so, can the employee use one of the two methods prescribed in Division 28 ITAA97 (that is, the cents per kilometre method or the log book method) or otherwise, to claim a deduction for car expenses?

Expense deductions denied
Broadly, “car expenses” incurred by an employee in respect of a car provided by an employer are specifically denied as a deduction under s51AF ITAA36.

In particular, a deduction for “car expenses” is denied where:

• an employer during a period provides a car for the exclusive use of a person who is, or of persons any of whom is, an employee of the employer or a relative of such an employee, and
• at any time during that period, the employee or a relative of the employee is entitled to use the car for private purposes.

A “car expense” is defined under s28-13 ITAA97 to include any loss or outgoing to do with a car (including costs in operating the car and its tax depreciation).

Note also that under s51AF ITAA36, the deduction is denied for car expenses that are incurred:

• during the relevant period in which the car was provided, or
• is wholly or partly attributed to that period.

Also, as noted, a deduction is not allowed if the car is used by a relative such as a spouse, a parent or a child (see s995-1 for full definition).

In this case, the running costs incurred by an employee from their after-tax income in relation to the car fringe benefit would not be deductible to them due to the operation of s51AF. In other words, they cannot claim a deduction for those costs – whether by using one of the methods in Division 28 ITAA97 or as a general deduction under s8-1 ITAA97.

Section 51AF applies because the vehicle, under the novated lease arrangement, was provided to the employee for her exclusive and private use.

Notwithstanding the above, an employee may still benefit from the arrangement. The after-tax contributions towards the car’s running costs reduce the amount of FBT that they would have been required to salary sacrifice as a component of the total remuneration.

For further questions and answers on Salary Sacrifice please speak to Kerryn or Leone

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The ATO has issued guidance on making claims for mobile phone use as well as home phone and internet expenses. Substantiation for mobile, home phone and internet costs

It says that if a client uses any of these for work purposes, they may be able to claim a deduction if there are records to support claims. But the ATO points out that use for both work and private use will require a taxpayer to work out the percentage that “reasonably relates” to work use.

Substantiating claims
The ATO requires that records are kept for a four-week representative period in each income year to claim a deduction of more than $50. These records can include diary entries, including electronic records, and bills. “Evidence that your employer expects you to work at home or make some work-related calls will also help you demonstrate that you are entitled to a deduction,” its guidance says.

When your client can’t claim a deduction for their phone
Of course if their employer provides your client with a phone for work use and also pays for usage (phone calls, text messages, data) then they are not able to claim a deduction. Similarly, if your client pays for usage but are subsequently reimbursed by their employer, they are not able to claim a deduction.

How to apportion work use of the phone
As there are many different types of plans available, your client will need to determine the work use using a reasonable basis.

Incidental use
If their work use is incidental and they are not claiming a deduction of more than $50 in total, they can make a claim based on the following, without having to analyse their bills:

• $0.25 for work calls made from a landline
• $0.75 for work calls made from a mobile
• $0.10 for text messages sent from a mobile.

Usage is itemised on bills
If they have a phone plan where they receive an itemised bill, they need to determine their percentage of work use over a four-week representative period, which can then be applied to the full year.

They need to work out the percentage using a reasonable basis. This could include:

• the number of work calls made as a percentage of total calls
• the amount of time spent on work calls as a percentage of total calls
• the amount of data downloaded for work purposes as a percentage of total downloads.

Usage is not itemised on bills
If they have a phone plan where they don’t receive an itemised bill, they can determine their work use by keeping a record of all calls over a four-week representative period and then calculate their claim using a reasonable basis.

The ATO uses an example to further explain this.
Ahmed has a prepaid mobile phone plan that costs him $50 a month. He does not receive a monthly bill so he keeps a record of his calls for a four-week representative period. During this four-week period Ahmed makes 25 work calls and 75 private calls. He worked for 11 months during the income year, having had one month of leave. He therefore calculates his work use as 25% (25 work calls out of 100 total calls). He claims a deduction of $138 in his tax return (25% x $50 x 11 months).

Bundled phone and internet plans
Nowadays phone and internet services are often bundled together. The ATO says that when taxpayers are claiming deductions for work-related use of one or more services, they need to apportion their costs based on their work use for each service. “If other members in your household also use the services, you need to take into account their use in your calculation.”

If a taxpayer has a bundled plan, they need to identify their work use for each service over a four-week representative period during the income year. This will allow them to determine their pattern of work use, which can then be applied to the full year.

A reasonable basis to work out their work-related use could include:

Internet:

• the amount of data downloaded for work as a percentage of the total data downloaded by all members of the household
• any additional costs incurred as a result of work-related use – for example, if work-related use results in them exceeding their monthly cap.

Phone:

• the number of work calls made as a percentage of total calls
• the amount of time spent on work calls as a percentage of total calls
• any additional costs incurred as a result of work-related calls – for example, if work-related use results in them exceeding the monthly cap.

Again, the ATO uses a worked example to illustrate.

Des has a $90 per month home phone and internet bundle, and unlimited internet use as part of his plan. There is no clear breakdown for the cost of each service. By keeping a record of the calls he makes over a four-week representative period, Des determines that 25% of his calls are for work purposes. Des also keeps a record for four weeks of the data downloaded and determines that 30% of the total amount used was for work.

He worked for 11 months during the income year, having had one month of leave. As there is no clear breakdown of the cost of each service, it is reasonable for Des to allocate 50% of the total cost to each service.

Step 1 – work out the value of each bundled component.
Internet: $45 per month ($90/2 services).
Home phone: $45 per month ($90/2 services).

Step 2 – apportion your work related use.
Home phone: 25% work related use x $45 per month x 11 months = $124.
Internet: 30% work related use x $45 per month x 11 months = $149.
In his tax return Des claims a deduction of $273 ($124 + $149) for the year.

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You have until 31 October each year to lodge your tax or you have a later due date when a registered tax agent prepares your tax return.

Failure to lodge on time penalty

The ATO may apply a penalty for failure to lodge on time if your tax return is not lodged by the due date.

Generally, the ATO apply a penalty for every 28 days (or part thereof) that your tax return is overdue, to a maximum of $850. The ATO may apply the penalty even where there is no tax payable.

Business Lodgements

If you use a tax agent to prepare and lodge your business activity statements (BAS) or your business tax returns they usually have an extension of time to meet the lodgement obligations.

As your agent the accountant needs to have all the necessary information to be able to accurately assess your situation and meet the necessary lodgement deadlines. Even though an accountant has an extension it is the client’s responsibility to make sure the information is provided in a timely manner.

Business Due Dates for Lodgement

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