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Substantial penalties for missing or invalid logbooks

ATO audit activity is increasing and, in our recent experience, logbooks are a current target. If you do not have a logbook or your logbooks are not valid, you must act now or risk being potentially liable for the FBT shortfall, penalties and interest for six or more FBT years.

The messaging is clear around car fringe benefits: if you do not keep a logbook, the use of a vehicle is considered 100% private use by the ATO.

We outline key information regarding logbooks below:

What if I don’t have a logbook?

If you do not have a logbook recording business-related use for the cars (see definition below) in your business, the ATO is likely to consider the vehicle to be used 100% for private purposes.

This can be very expensive for your business as FBT is taxed every year, on roughly a $1:$1 basis. Without a logbook, FBT will generally be assessed based on 20% of the value of the car. Therefore, on a $50,000 car, the FBT bill may be some $10,000 each year. The more expensive the car, the greater the problem.

While having a logbook may not reduce the FBT bill to nil, it may reduce the annual FBT burden for the business. It will also be necessary in the case of an ATO review, to evidence any less-than-100% private-use claim.

What happens if the ATO finds out?

If the ATO is able to amend an FBT return and finds that a car in your business does not have a valid logbook, they are able to deem 100% private use for that car and assess FBT as such. In that case, the business will need to pay the FBT shortfall for each year. For example if the business claimed 60% business use on a $50,000 car, the FBT shortfall will be the difference between the $10,000 calculated above and the FBT already paid.

If you lodge an FBT return, it can be reviewed and amended up to six years after lodgement. Therefore, the timeframe for the ATO changing a business’ FBT bill is quite significant, and can cause a hefty dent in the cashflow of a business.

This is worse if no FBT return was lodged, as that FBT year is open to be reviewed and amended for an unlimited timeframe. We therefore recommend that an FBT return is lodged even where the FBT is expected to be nil – as an extra safety measurement to mitigate the risks where possible.

Further, the ATO may impose penalties in a number of situations. Substantial penalties may apply if you make false or misleading statements. Penalties may also apply for FBT returns being lodged late (such as where no FBT was lodged on the basis that the car was 100% business use, and this turns out to be incorrect).

Interest charges may also apply if the ATO disagrees with your business-use percentage and your tax liability increases (interest accrues daily).

Therefore, when you consider the FBT shortfall, plus penalties and interest, for 6 FBT years (or even more): is this a cost your business wants to spend?

What is involved in getting a logbook?

All of this can be avoided if a valid logbook is held for each car in the business to evidence any business-use claim.

A logbook records the private and business use of a car, including kilometres travelled and odometer readings. This must be kept for a minimum period of 12 weeks, and should be representative of the usual travel undertaken in that vehicle. The completed logbook can then be applied for 5 years before it must be redone (or if the usage of that car changes significantly).

To make life easier here, there are now numerous apps that can be used to track motor vehicle mileage, including the ATO app “myDeductions” which allows you to record any work-related travel and expenses.

Which vehicle does this apply to?

For FBT purposes, a car is defined as one of the following:

  • a sedan or station wagon;
  • any other goods-carrying vehicle with a carrying capacity of less than one tonne (including panel van, utility, four-wheel drive vehicles);
  • any other passenger-carrying vehicle designed to carry fewer than nine passengers.

Therefore, some utilities, vans and trucks may be excluded from the definition of “car”, and such FBT for the private use may not apply. It is important to note that other rules and exemptions may still apply, so please consider FBT on these vehicles as well.

Next steps

We expect the ATO to keep pushing on this as they continue their audits and reviews. Therefore now is the time to:

  1. Review the cars in your business and understand where the risks lie; and
  2. Consider where logbooks may be needed, and ensure you/your employees have appropriate logbooks ready to go.

It is also important to consider whether you should keep personal motor vehicles out of the business, so reach out before bringing the next car into the business to discuss the options here.

If you are concerned about any FBT risks in this space or have any queries, contact Murray Howlett, Ramona McGregor or your Pilot advisor on (07) 3023 1300.