Company cars and vehicle benefits in Australia
Reviewed by Mellow Editorial Team, HR & payroll content team
A company car or vehicle benefit triggers Fringe Benefits Tax (FBT) obligations for the employer. The core process is: determine the taxable value of the benefit using the statutory formula or operating cost method, gross it up, pay FBT at the applicable rate, and report it through your annual FBT return.
What counts as a car fringe benefit
The ATO treats a vehicle as a "car" for FBT purposes if it is designed to carry fewer than nine passengers or a load under one tonne. This covers most sedans, SUVs, utes used as passenger vehicles, and station wagons.
A fringe benefit arises when you make a car available for an employee's private use — including simply allowing the car to sit at the employee's home overnight. You do not need to prove the employee actually drove it privately; availability is enough.
Vehicles that do not meet the car definition — panel vans, larger utes, motorcycles — may still attract FBT under the separate "residual benefit" rules, so the obligation does not disappear simply because the vehicle falls outside the car category.
The two methods for calculating taxable value
Statutory formula method
This is the simpler of the two. The taxable value is a fixed 20% of the car's base value (its GST-inclusive cost, including dealer delivery but excluding registration and stamp duty). That 20% applies regardless of how many kilometres the employee drives privately, which makes it predictable but sometimes expensive for low-use situations.
You reduce the taxable value proportionally if the car was not available for the full FBT year, or if the employee made after-tax contributions toward the car's costs.
Operating cost method
Here the taxable value is the total operating costs of the car multiplied by the employee's private-use percentage. Operating costs include depreciation, interest (notional or actual), fuel, insurance, servicing and registration.
The employee must keep a logbook for a continuous 12-week period to establish the private-use percentage. That logbook stays valid for five years unless the usage pattern changes materially. If private use is genuinely low — say, under 20% — this method usually produces a lower taxable value and therefore less FBT.
Grossing up and paying FBT
Once you have the taxable value, you gross it up to reflect the fact that employees receive benefits pre-tax. There are two gross-up rates depending on whether you are entitled to a GST credit on the benefit:
- Type 1 benefits (GST-creditable): higher gross-up rate
- Type 2 benefits (no GST credit): lower gross-up rate
Car fringe benefits are generally Type 1. FBT is then calculated on the grossed-up amount. You pay it, not the employee.
The FBT year runs from 1 April to 31 March. Your FBT return is due on 21 May (or later if lodging through a tax agent). Employers who expect to owe FBT above a certain threshold must also make quarterly instalments via their activity statements.
FBT paid is generally deductible for income tax purposes, which partially offsets the cost.
Employee contributions and novated leases
Employees can reduce the FBT liability by making after-tax contributions toward the car's operating costs or the cost of the car itself. Every dollar contributed reduces the taxable value dollar-for-dollar under the statutory formula.
A novated lease is a three-way arrangement between the employee, employer and a finance provider. The employer takes on the lease obligations and deducts payments from the employee's pre-tax salary. This can be tax-effective for employees — it reduces their income tax base — but it does not eliminate your FBT obligation as the employer. You still need to calculate and report the benefit. Many employers pass the FBT cost back to the employee through the salary packaging arrangement, but that needs to be structured correctly in the employee's contract.
Electric and plug-in hybrid vehicles
From 1 April 2022, certain zero or low-emission vehicles became exempt from FBT under the electric car exemption. The exemption applies to battery electric vehicles, hydrogen fuel cell vehicles, and plug-in hybrids (though the plug-in hybrid exemption has a legislated end date — check the current ATO guidance for where that stands in the 2026/27 year).
To qualify, the car's value must be below the luxury car tax threshold at the time of first retail sale. Even exempt vehicles must still be reported on the employee's payment summary equivalent via Single Touch Payroll, because the exempt amount counts as a reportable fringe benefit and can affect the employee's adjusted taxable income — which in turn affects Medicare levy surcharge, HECS/HELP repayment thresholds and some government payments.
Keeping records
You need to retain records that support whichever valuation method you used. For the statutory formula that means the purchase documentation and any log of days the car was unavailable. For the operating cost method it means the logbook, odometer records and all cost receipts for the period. The ATO requires these records for five years from the date the FBT return is lodged.
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