Fringe Benefits Tax (FBT) & Logbooks
With the 1st April being the start of a new FBT year it is prudent to alert clients to the risk of having a car registered in their company name and not lodging an FBT return. The ATO is matching information from the various motor registration departments with tax returns. Please contact us if this applies to your situation
A recent decision by the Full Federal Court has sounded a warning to intergroup payments for payments for the use of group assets. The taxpayers were operating entities within a real estate group. The assets the taxpayers used in conducting their businesses were owned by two trustee companies within the group which were held on trust for the unit holders of two unit trusts. Between 2005 and 2015 the taxpayers and the trustees had written agreements pursuant to which the taxpayers were obliged to pay the trustee certain fees calculated in accordance with the provisions of the agreements for the use of the trust assets. In 2015 the written agreements came to an end, but thereafter the taxpayers continued using the trust assets and made payments to the trustees during the tax years ending 2016 to 2019 (the relevant years for the case). The taxpayers claimed deductions for the payments on the grounds that they were service fees for the use of the assets.
The Commissioner took a different view and disallowed the deductions resulting in amended assessments and administrative penalties.
Before the single judge in the Federal Court the taxpayers argued that the payments were service fees made pursuant to agreements made partly in writing and partly by conduct. The taxpayers failed to prove the existence of the asserted agreements, but the primary judge nonetheless found that the taxpayers were subject to a liability , contractual in nature, to pay the trustee’s service fees in each year. Consequently the taxpayers succeeded in proving the Commissioner’s assessments were excessive. The primary judge also concluded that all the amounts claimed were paid in accordance with the inferred contract liability in each of the years.
The notice of appeal by the Commissioner raised two principal issues for determination.
1 – Was the primary judge correct to conclude that the taxpayers entered into inferred contracts with the trustees of the trusts for the use of trust assets upon payment of a fair and reasonable fee in each year?
2 – If so, was the primary judge correct to conclude that all the relevant amounts the taxpayers paid to the trustees were referrable to the inferred contracts?
The full court held that there was insufficient evidence of an objective manifestation of mutual assent of the taxpayers to contract on the terms by which the taxpayers were liable to pay a fair and reasonable fee for the use of the assets.
The following comments from the case give a good indication of the full court’s reasons.
-it is not sufficient that the conduct be consistent with what is asserted was the existence and terms of a binding agreement. The evidence must positively indicate both parties considered themselves bound by that agreement.
– the circumstances in which a contract will be inferred by conduct are rare.
– the private thoughts or intentions of the parties are not relevant and cannot outwardly manifest or communicate to reasonable people in the position of the parties a mutual intention to contract on particular terms.
– the uncommunicated private thoughts and intentions of the common directors or director are not relevant.
– however there were no facts found of any objective communication of an expectation of the trustees to be paid a fair and reasonable fee for use of the trust assets or a communication of acceptance that a fair and reasonable fee would be paid for that use.
– there was no direct evidence of any communication between the natural persons who were directors of the taxpayer and the trustees of an accepted liability on the part of the taxpayers to pay a fair and reasonable fee for the use of the trust assets.
The full court concluded the uncommunicated subjective thoughts of the two directors about ensuring the that the unit holders of the unit trust received a return of 8% indirectly by the trustees charging the taxpayers a fair and reasonable fee for the use of the trust assets provided no foundation for inferring the existence of a contract between the taxpayers and the trustees. Likewise one director’s subjective view that the amounts recorded as service fees in the taxpayers financial statements provides no foundation for inferring the existence of a contract.
The director’s approval of the financial statements of the taxpayer and the trustees after the end of each relevant tax year was also not conduct from which the existence of a contract could be inferred because the financial statements were prepared on the mistaken assumption that the 2005 agreements were operative.
Conclusion
Taxpayers seeking to avoid similar findings should ensure that they can provide the necessary evidence that the taxpayers in this case couldn’t. Written contracts/agreements remain the safest way to establish such intent. However interparty correspondence, correspondence with advisors or invoices may be sufficient.
LOGBOOKS
With the Fringe Benefits Year commencing on the 1st April this is a timely reminder about the need to keep a logbook and to keep it in the correct fashion. The same is appropriate for an individual taxpayer.
Taxpayers can keep the same logbook for their car for five (5) years, but there are circumstances where a new one may be required. A new logbook may be required if there is a change of employment, a change a residence or workplace or the pattern of use of the car changes.
A taxpayer using more than one car must keep a logbook for each car and for the same period. A logbook can be kept for a representative 12 week period. The logbook should be filled in after each business journey.
If a new car is purchased and the taxpayer wants to use the same logbook a nomination must be made in writing and the nomination must be made before lodging their tax return.
If claiming a car expense in a personal return the taxpayer must keep the following records;
- Odometer reading at start and end of the financial year.
- Proof of purchase or a lease agreement and proof of lease payments
- Depreciation calculations
- Fuel and oil receipts or a reasonable estimate of these expenses, based on odometer readings
- Registration and insurance – evidence of payment
- Servicing, repairs and tyres – evidence of payment.
