When Not Making an Election in Writing is Making an Election in Writing

At a meeting of the National Tax Liaison Group (FBT subcommittee) on 12 November 2009 the ATO noted that a written election was not required to be lodged with the Commissioner where car fringe benefits are calculated under the cost basis method that results in a nil benefit to the employee such as where the car is used 100% for business purposes. The ATO accepts that the employer has made a declaration to the Commissioner although in fact such a declaration was not made.

This issue has again arisen as a result of Jetto Industrial Pty Ltd and Commissioner of Taxation [2009] AATA 374.

Where the cost nasis method (rather than the "statutory method") is used for the purposes of calculating FBT for a motor vehicle benefit the FBT Act provides that an election shall be made in writing by the employer to the Commissioner:

FRINGE BENEFITS TAX ASSESSMENT ACT 1986 - SECT 10

Taxable value of car fringe benefits--cost basis

1) An employer may, in relation to a particular car, elect that this section apply in relation to all the car fringe benefits in relation to the employer in relation to a year of tax that relate to that car.
...

4) An election by an employer under subsection (1) in relation to a year of tax:

a) shall be made by notice in writing to the Commissioner; and
b) shall be lodged with the Commissioner on or before the declaration date.

In Jetto the employer did not make such a written election although the cost basis was used. In that case the employee director’s vehicle was used 100% for business purposes and no FBT return was lodged since the taxable value was nil. As a return was not lodged there was no written election lodged with the Commissioner. The tribunal in Jetto’s Case was of the view that once a car benefit exists and no election is madem the statutory formula method would automatically apply (p32).

The ICAA requested clarification of the ATO view and the tortuous response was as follows:

“There does not appear to be any good reason why an employer should be required to actually prepare a notice and lodge it with the Commissioner. The TA believes that it should be sufficient that the employer has calculated any car fringe benefits under section 10 rather than section 9. In calculating benefits under S.10 and lodging a return accordingly, the TA believes that the ATO should accept that the employer has made a declaration which complies with the requirements of the section.

The requirement to lodge a declaration would, in any case, seem to be contrary to both the concepts of a self-assessed tax and simplification.

The ATO advised that this matter was considered by the National Tax Liaison Group at its meeting of 17 July 1991. The minutes of that meeting include:

'... the ATO does not require elections to be lodged with the annual return. Rather, an employer must be able to demonstrate through adequately maintained business records that the election has been made, if required to do so on audit.

... in regard to motor vehicle benefits, employers are able to demonstrate their election on the return form itself. A separate record of the election is not required.'

Where a fringe benefits tax return is not required to be lodged (for example, due to employee contributions), adoption in the working papers of the operating cost basis, supported by the necessary logbook, odometer and other motor vehicle records, would be sufficient election. In accordance with Taxation Determination TD 92/199, the necessary calculations would need to be completed by 28 April each year.

The ATO also advised that the policy advice provided to the NTLG in 1991 and restated above amplifies and clarifies the advice given in question 31 of attachment 3 of Miscellaneous Tax Ruling MT 2021 which issued on 25 August 1986. (MT 2021 is under review for a rewrite, however it does not have a high priority.)

It is noted that whilst TD 92/199 (mentioned above) has been withdrawn, the reason for withdrawal was due to the change in the due date for FBT returns and the issue was also covered in the Fringe benefits tax: a guide for employers.”

Although in the end this ends up being in the taxpayer’s favour we should not be surprised when the same “tortuous” logic is used that results in a position unfavourable to the taxpayer. This is not a satisfactory solution and is dangerous for taxpayers. The obvious solution is amendment of the FBT legislation which is entirely preferable to attempting to justify how not making an election in writing to the Commissioner somehow equals making an election in writing to the Commissioner. It also runs counter to the certainty principle, amongst others.

Clients and advisors should consider whether to lodge a nil FBT return (See: How Exposed Are You). The cost of preparation and lodgement should be viewed as a form of insurance as the FBT ammendment clock is stopped at 3 years. Although we have the ATO view that lodgement of a return (and an election) is not necessary where a nil liability results from the cost basis method, a nil FBT return has the advantage of complying with the law as written. Business owners will need to decide whether the additional compliance costs of preparation and lodgement are worth the added security.