Tax Claims on Cars and Entertainment
April 2005

These are the two most complicated items in income tax. In personal returns there are four different ways to claim the business use of cars.

If the car or food is provided to an employee, a separate tax - Fringe Benefits Tax - is levied. Added to this is the question of GST. For private businesses we try to avoid preparing another tax return and thus calculate the private proportion at the time that we prepare the business's income tax return.

For both expenses there is an extra level of paperwork required besides the normal accounting records. As the Fringe Benefits year ends on 31 March, we send to all clients who provide a car to an employee, including the directors, and who either use the log book method or whose cars drive more than 15,000kms per year, a form to record the odometer reading. If you use the log book method in your personal return then you need to take an odometer reading at 30 June. If you do not take an odometer reading then you can't use one of the concessional methods. This is a free kick to the Taxation Office if you get audited.

When an employee reimburses an employer for the private use of a motor vehicle, this becomes a supply for GST purposes and the employer has to prepare a tax invoice for the employee and charge the employee GST. Then during the year the employer claims GST on all motor vehicle expenses. As many employers have a number of cars, one each for mum and dad and one for the children, it is important to set up separate general ledger accounts for each car as it is likely that the private proportion will be calculated differently for each. The calculation will also change over the life of the car and our experience is that the car may need to be transferred from the employer to the individual after about four years of ownership. This transfer also involves GST.

A car fringe benefit is reportable on an employee's payment summary (group certificate) and thus the employer needs to keep track of which employee is using which car. This does not apply to reimbursement of the private proportion.

Before you purchase a new car we suggest that you give us a call so that we can advise you in which entity to buy the car, which is the best way to treat it for FBT and GST and which method of finance to use. Different methods of finance allow you to either finance the GST or claim it back on the next BAS at time of purchase or over the period of the finance. This also depends on whether you use the cash or accruals method.

With entertainment it is also necessary to set up separate accounts in your general ledger. These are usually
1) for entertainment that is subject to FBT and is thus deductible and may or may not be entitled to an input tax credit for the GST paid
2) for entertainment that is not deductible but is thus not subject to FBT and for which no GST credit can be claimed

Confused? If you get audited by the Taxation Office this is the reason you should be prepared for an extra payment of tax as it is probably impossible to get it right - but this is only if the tax auditor can work it out themselves.