Car Subscription and Tax Deductions Explained

Car Subscription and Tax Deductions Explained2020-08-27T10:16:28+10:00

Carly Car Subscription provides tax
benefits for individuals and businesses

Car usage continues to evolve as businesses seek solutions that provide flexibility and cost savings for their specific needs. Carly car subscription is an alternative to a car loan or car lease that provides access to cars without long-term financial commitment.

To help provide clarity to our Subscribers, Carly has secured a Product Ruling (PR 2020/11) from the Australian Taxation Office that provides a clear framework for Carly subscribers using cars for business or work purposes to claim tax deductions. Carly is the only car subscription offering that can currently provide certainty of tax deductibility on car subscription payments as the ATO Product Ruling only applies where an arrangement is implemented strictly in accordance with the rules reviewed by the ATO. This ruling only applies to individuals and businesses that have entered into a Carly Car Subscription agreement.

This information is general in nature. You should consult a professional tax advisor to discuss your specific circumstances.

Income Tax Deductions for

Individuals

Income Tax Deductions and Fringe Benefits Tax for

Business

Income Tax Deductions for Individuals

Your Situation
As an individual using Carly, you can claim your Car Subscription Fee payments in your income tax return for the period of subscription if you are using the vehicle for business or work purposes. This includes:

  • carrying on your business, or
  • travel between two places of work or in the course of your employment and not for private purposes.

For the purpose of Individual tax benefits, subscription is categorised into two time periods; short-term subscription and long-term subscription. The method under which you can claim differs depending on the length and category of your subscription.

Long-term subscription
If you have subscribed for more than one month, there are two methods that can be used to calculate your income tax deduction.

The deduction is still available even if you switch cars within a month of starting your subscription.

These methods are:

  1. Cents per kilometre method – allows you to use a set rate for each kilometre travelled for business up to a maximum of 5,000km per year. For the 2021 income year, this is $0.72/km.
  2. Log book method – your deduction is worked out by multiplying a business use percentage, which is obtained from maintaining a log book, by the total car expenses for the income year. You can use the same log book for 5 years.

Further information regarding these calculation methods can be found here.

Short-term subscription
If you have subscribed for one month or less, you cannot use the methods detailed for long-term subscription above.

Instead, you can claim an income tax deduction for the full dollar amount of the Subscription Fee payment that relates to business use.

There are two important criteria to keep in mind when claiming your Subscription Fee under the short-term subscription period method:

  1. You must apportion these costs so that you do not claim a deduction for any time that the vehicle was used for private purposes (such as trips to the shops for personal reasons, visiting friends or family).
  2. You need to keep evidence of how you arrived at this apportionment.

Income Tax Deductions and Fringe Benefits Tax for Business

Your Situation

  • Your business is incorporated as a company, or is established as a trust;
  • Your business has a Carly Car subscription and is making the Subscription Fee payments out of its own profits; and
  • Your business provides the cars to employees for private and / or business use.

Income Tax
Your business can claim the full dollar amount of all Subscription Fee payments in its income tax return, for the period of subscription, as long as the vehicles are used in carrying on your business and/or provided to your employees.

A business will normally be subject to fringe benefits tax (FBT) where a car is provided to an employee for their private use. This may include, for example, where the car is used on work sales trips, but can also be used for personal trips.

For the purpose of Business tax benefits, subscription is categorised into two time periods; short-term subscription and long-term subscription. The method under which you can claim differs depending on the length and category of your subscription.

Long-term subscription
If your subscription period is three months or longer, then the availability of the car for private use is a fringe benefit and FBT is payable. This will apply even if the vehicle is switched within three months of commencing the subscription.

Short-term subscription
If your subscription period is less than three months, and you do not intend to continue with your subscription, a residual fringe benefit will arise and FBT is payable.

FBT calculation – car fringe benefits
Broadly, the FBT payable on car fringe benefits is calculated using either of the following two methods:

  • Statutory method

If the commencement of the subscription period is around the same time the car was purchased, then under method one, FBT will be calculated using the cost price of the vehicle to the third party fleet owner at or about the time the subscription commenced (including cost of any fitted non-business accessories and dealer delivery charges (i.e. GST and/or luxury car tax) where applicable. 

However, FBT will be calculated using the market value of the vehicle if it was purchased at some other time. This can reduce the FBT liability of the company as FBT will be calculated based on a lower cost price or “base value”.

  • Operating cost method

Under the operating cost method, FBT will be calculated based on the vehicle’s operating costs (which will include Subscription Fees and fuel costs) and also factoring in a business use percentage. Where the car subscribed for has a high business use, then this method may produce a better FBT outcome. 

More information regarding calculating car fringe benefits can be found here.

FBT calculation – residual fringe benefits
Broadly, FBT will be calculated using the full dollar amount of the Subscription Fees incurred by the business. The FBT may be reduced by the “otherwise deductible rule” where applicable.

 

Business Customers – Car Subscription Arrangers

Your Situation

  • Your business is incorporated as a company, or is established as a trust; 
  • Your business has a Carly Car subscription and pays the Subscription to Carly out of its own profits; 
  • Carly arranges a car subscription between a third party fleet owner and your employees; and
  • The fleet owner provides the car directly to your employee.

Income Tax
Your business can claim the full dollar amount of all Subscription Fee in its income tax return, for the period of subscription, as long as the cars are used in carrying on your business. This will be the case where you provide the cars to your employees for their use.

Fringe Benefits Tax
A business will normally be subject to FBT where a car is available for private use by an employee. This may include, for example, where the car is used on work sales trips, but can also be used for personal trips.

As the car is provided by the fleet owner under this scenario, under an arrangement that you are a party to, a car fringe benefit will arise regardless of the duration of the subscription period.

FBT Calculation – Car Fringe Benefits
Broadly, the FBT payable on car fringe benefits is calculated using either of two methods:

  • Statutory method

Under the statutory method, FBT will be calculated using the cost price of the vehicle (excluding registration and stamp duty) to the fleet owner, including, cost of any fitted non-business accessories and dealer delivery charges (GST and/or luxury car tax) where applicable.

  • Operating cost method

Under the operating cost method, FBT will be calculated based on the vehicle’s operating costs (which will include Subscription Fees and fuel costs) and also factoring in a business use percentage.

Where the car subscribed for has a high business use, then this method may produce a better FBT outcome.

More information regarding calculating car fringe benefits can be found here.

 

Business Customers – Car Subscription Reimbursers

Your Situation

  • Your business is incorporated as a company, or is established as a trust; 
  • Your business has a Carly Car subscription and pays the Subscription to Carly out of its own profits; 
  • Carly arranges a car subscription between a third party fleet owner and your employees; and
  • You reimburse the employee for their Subscription Fees paid to Carly.

Income Tax
Your business can claim the full dollar amount of all Subscription Fee payments that it has reimbursed to your employees in its income tax return, for the period of subscription, as long as the cars are used in carrying on your business. This will be the case where you provide the cars to your employees.

Fringe Benefits Tax
A business will normally be subject to FBT where an expense is reimbursed by a business on behalf of an employee. A car fringe benefit will not arise under this scenario.

An expense payment fringe benefit will arise regardless of the duration of the subscription period.

FBT Calculation – Expense Payment Benefits
Broadly, FBT will be calculated using the full dollar amount of the Subscription Fees reimbursed by the business.

The FBT may be reduced to the extent the payments would be otherwise deductible to the employee in accordance with the FBT rules.

More information regarding calculating expense payment fringe benefits and relevant exemptions or reductions (if any), such as the “otherwise deductible rule” can be found here.

The complete ATO Product Ruling (PR 2020/11) can be viewed here.