The $88K FBT motor vehicle trap

Imagine this. You're the sole director of a company. Your company runs from a building located on the same block of land as your home. The buildings are divided by a wall, and have separate driveways and letterboxes.

In 2004, you purchased a Lexus for $119,000. This car was solely for use for business purposes.  You garage the car at the office building. As the car is solely for business use, you assume that FBT doesn't apply, so consequently, you don't lodge FBT returns. You also don't keep log books, again as the car is only used for business.

At least, no log books are kept until the Tax Office decides in 2009 to audit you. Following the audit, the Tax Office presents you with an assessment for $88,000 in outstanding tax. You challenge the decision, claiming it's excessive, but lose.

Thankfully, this is only imagined. For you. For one company director, this is exactly what happened.

The reason for the assessment? The FBT Act states that the a vehicle will be available for private use (and therefore subject to FBT) if it is garaged or kept "at or near a place of residence of the employee or an associate of the employee." Because of the location of the directors house and place of work, the Administrive Appeals Tribunal found that the Lexus was kept 'near' the place of residence and so stated that the director was liable for car fringe benefits for each day it was garaged there.

Another issue the director faced was the lack of log book and therefore proof that the car was solely used for business purposes. To use the operating cost method (or log book method) of recording business usage and personal usage of a car, you need to elect to use this method with the ATO, and then keep a log book and other necessary documentation from the first day of owning the car. While the ATO will accept that non-lodgement of an FBT return is an election to use the operating cost method of recording business usage, you still need to maintain records of use, and any other documents that show how you arrived at your nil FBT position. In the case of our director, as the log book was only kept starting from when the ATO announced its intention to conduct an audit, the log book was incomplete.

If there is no record to show how you arrived at your nil FBT position (as demonstrated by this sole director), the statutory method applies. The statutory method of calculation is based on the number of days the fringe benefit is provided. Which, in the case of our director, was 365 days each year.

While there are some uncommon circumstances in this case, such as the place of business being on the same block as the director's home, there's some important lessons we can all learn:
1. Always keep records to justify your tax decisions.
2. Be aware of what method you need to use for FBT and motor vehicles.

In the case of cars, you need to have records of which are subject to FBT, when things change, periods of use and the method of FBT calculation.
If you use the statutory method, you need to record the odometer at the end of each FBT year (ending 31 March), and if you have elected to use the operating cost method (log book method), make sure your log book is up to date.

Another point to note is that informal arrangements between employers and employees can unintentionally give rise to an FBT liability. These informal arrangements can cover things such as allowing employees to use company cars for private use over a weekend.

For more information about what is and isn't subject to FBT, contact our offices.

Business Scruples

Recently, we've been talking to a new investor in our business and we're starting to have doubts about the value of our company. How do we know how much our business is really worth?

Knowing what your business is worth is an important part of running a business, not something to be considered only when selling the business. It's also important to be able to prove the value of your business if you need to borrow money, want to grow your business or analyse profits and performance, or are looking to restructure your company.

The value of your business is a key benchmark. If you don't have a realistic worth to measure against, you could be setting your company up for under-performance.

However, it can be really hard for business owners to know the real worth of their company. When you put your heart and soul into your business, you think your efforts should pay off with a high worth. How do you know?

Well, if you're a publically listed company (or have an interest in one), the market will determine the value of your company. Private business, though, is a little more subjective. There is no clear indication to tell you what the business is worth.

So, how do you know if your perception of your business worth is realistic?

There's no one size fits all method for measuring business worth. One reason so many business owners misinterpret their business worth is because they compare their business to another, which may be fundamentally very different.

There are a few different accepted ways to measure business worth for SMEs. Generally, businesses will be valued on earnings, cash flow or assets. Different ways of measuring will result in different outcomes. It's worth remembering that the best way to measure your business isn't necessarily the one that produces the best results. The best measure is the one that is most in line with the fundamentals of your business. For example, a business that has a limited life with a defined income stream will be valued on the cash stream it will produce.  Whereas a mature business, like a wholesale business being valued as a going concern (that is, as an ongoing business), is likely to be valued on a multiple of its earnings.  A business, like a farm, is more likely to be valued on its tangible assets.

Risk also plays a large part in business value. The higher the risk, the lower the relative value (in most cases). This is because risk impacts the business in its ability to maintain earnings and a stable cash flow, and affects the reliability of its assets. If you want to increse business worth, it can be good to look at the areas where you can reduce risk, without it impacting on earnings.

Ideally, your business should generate and grow its earnings, its free cash flow, and its asset base. These factors, and a positive growth trend, are indicators of real value and a business that is likely to be growing in value.  The absence of these factors may bring into question the value that really exists.

It's a really good idea to have a business valuation completed if you are basing commercial or tax decisions on your business value.  At least then you have a third party opinion of what your business is really worth.

For more information about valuing your business or how to improve your business worth, contact our offices.

Quote of the month

"Don't find fault, find a remedy."

Henry Ford