FBT on motor vehicles: What the proposed categories mean for employers

Keeping track of private-use days, applying exemptions and maintaining records have long been part of managing motor vehicle fringe benefit tax (FBT). For employers with large vehicle fleets, the compliance work can be considerable.

The Taxation (Annual Rates for 2026–27, FBT Simplification, Foreign Investment Funds, and Remedial Measures) Bill proposes to simplify this by replacing the current day-counting approach with a system that categorises vehicles according to their use.

If enacted as introduced, the changes would apply from 1 April 2027, shifting the focus towards how vehicles are used and what private use is permitted.

From counting days to categorising vehicles

Under the current rules, FBT generally applies when a motor vehicle is made available for an employee's private use, regardless of whether it is actually used privately. Employers need to track available days and when exemptions, such as the work-related vehicle exemption, apply.

The Bill would replace this day counting with a category-based approach. Vehicles would generally fall into one of six categories, each with a prescribed private-use percentage of 100%, 35%, 20% or 0%.

The proposed categories and their key requirements are summarised below.

 

Category	Vehicle use	Vehicle requirement	Private-use percentage
1	Mainly for private use (default category)	No branding required	100%
2	Mainly for business use, with private use permitted on rostered days off, during annual or statutory leave, and for travel between home and work	Branded vehicle*	35%
3	Mainly for business use on farmland by certain shareholder-employees or trust beneficiaries, with specified private use	Owned or leased by an employer carrying on a farming or agricultural business	35%
4	Mainly for business use, with private use permitted only for travel between home and work	Branded vehicle*	20%
5	Mainly for business use, with private use permitted only for travel between home and work involving a project of limited duration or work requiring travel to multiple work sites	Branded vehicle*	0%
6	Pool vehicle used exclusively for business	No branding required	0%

Source: Schedule 5, Part B of the Bill. Descriptions are summarised.

*Subject to the exceptions and waiver discussed below.

The focus would shift from counting private-use days to determining the applicable category. Certain incidental travel would be disregarded.

Small differences could have a significant impact

Consider two employees who both drive branded company vehicles home after work. One is permitted some private use on days off or during leave, as well as travel between home and work, while the other can use it only for business purposes and travel between home and work.

The first could fall into Category 2, with a 35% private-use percentage, and the second into Category 4, at 20%. If the second employee's home-to-work travel relates to a project of limited duration or work requiring travel to multiple work sites, Category 5 could apply at 0%. These outcomes are subject to the other category requirements, including branding.

Employers will therefore need to consider how a vehicle is used and what private use their policies and arrangements with employees allow.

There is another point worth noting. Category 1 is intended to be the default where no other category applies, potentially resulting in a 100% private-use percentage even where the vehicle is mainly used for business.

Branding will be an important consideration

There are exceptions to the branding requirement, including for certain vehicles purchased before the Bill was introduced or leased or rented under agreements entered into on or before that date, and vehicles owned or leased by certain farming employers. The Commissioner could also waive branding where it would be inappropriate because of the nature of the employer's business, the employee's role or the vehicle's operation.

Employers considering purchasing or leasing new vehicles may need to include branding in their decision criteria.

A simpler calculation, but not necessarily a lower FBT bill

The proposed approach should reduce some of the record keeping associated with day counting and exemptions as the FBT calculation would instead apply the relevant private-use percentage to the vehicle benefit valuation amount.

For example, consider a $60,000 petrol vehicle in Category 2, using the cost-price method. The proposed quarterly valuation rate for a petrol or diesel vehicle is 5% and Category 2 has a 35% private-use percentage. The quarterly fringe benefit value would therefore be (note that at the time of writing there is an error in the Bill for the proposed new quarterly value calculation):

$60,000 × 5% × 35% = $1,050

The $1,050 is the quarterly fringe benefit value, not the FBT payable. The relevant FBT rate is then applied to determine the liability for the period.

Different valuation rates would also apply under the tax book value method, including where Investment Boost has been claimed.

Generally, the proposed new valuation percentages have been increased and includes rates for hybrid and electric vehicles.  It is also proposed that the rates are reviewed once every four years.
While the calculation may be simpler, employers should not assume the result will be the same. Moving from day counting to fixed private-use percentages means some employers could see a different taxable benefit even where their vehicle arrangements have not changed.

What should employers be thinking about now?

Although the changes are still proposals, now may be a good time to consider how existing vehicle arrangements would fit within the new categories.

Start with vehicle policies and actual use. Can employees use vehicles on days off or during leave? Is private use restricted to travel between home and work? Do employees work at one location or multiple work sites? 

Policies should reflect what happens in practice. If circumstances materially change and no longer meet the criteria for the category, the vehicle must move to the applicable category from the first day of the following quarter.

For tax practitioners, reviewing clients' vehicle arrangements ahead of 1 April 2027 could help them be prepared to comply with the new FBT rules.