Statutory Formula vs Operating Cost: Which Costs Less?

The statutory formula method taxes a flat 20% of a car's value no matter how it is used. The operating cost method taxes only the private-use share of what the car actually costs to run. Which one produces the smaller FBT bill depends on the private-use percentage, and the usual advice stops there.

It should not stop there, for two reasons. First, "what the car costs to run" is a defined term, and for a car the employer owns it includes two large amounts that never leave anyone's bank account. Second, because one of those amounts shrinks every year while the statutory 20% stays pinned to the original price, the method that wins changes over the life of the car — and you are allowed to change with it.

How each method is calculated

Statutory formula method

• Taxable value = base value × 20% × (days available for private use ÷ 365), less any post-tax employee contributions
• Base value is the GST-inclusive cost price, including dealer delivery and non-registration accessories, excluding stamp duty and registration
• From the fifth FBT year the base value falls to two-thirds of cost price
• No logbook required

Operating cost method

• Taxable value = total operating costs for the FBT year × private-use percentage, less any post-tax employee contributions
• Requires a valid logbook — 12 continuous weeks, representative of your usual travel, plus odometer readings
• The lower the logged private-use percentage, the lower the taxable value

Both give a taxable value, which is then grossed up and taxed at 47%. Run either on your own figures with the FBT & Novated Lease Calculator.

Operating costs are not your cash costs

This is the part that most comparisons skip, and it is usually the largest number in the calculation.

Where the employer owns the car, operating costs for FBT purposes are the actual fuel, oil, repairs, maintenance, registration and insurance, plus two deemed amounts:

• Deemed depreciation — 25% of the car's depreciated value each year, on a diminishing-value basis, for cars acquired on or after 10 May 2006
• Deemed interest — the depreciated value multiplied by the statutory interest rate the ATO publishes for that FBT year

Where the car is leased rather than owned, the lease charges replace both deemed amounts. That is why a novated lease behaves differently from a company-owned car under this method, and it is covered in salary packaging and novated leases.

The scale matters. A $50,000 car in its first year carries $12,500 of deemed depreciation before a litre of fuel is bought, plus deemed interest on the full $50,000. So an owner who tallies up fuel, servicing, rego and insurance at $8,000 and enters that as their operating costs has understated the figure by more than they entered — which makes the operating cost method look far better than it is.

A worked comparison

Take a car with a $50,000 base value and, for the moment, $12,000 in total operating costs. The employer is registered for GST and can claim credits, so the Type 1 gross-up of 2.0802 applies.

High business use — 20% private, logbook kept

• Statutory: $50,000 × 20% = $10,000 taxable value → FBT of $9,776.94
• Operating cost: $12,000 × 20% = $2,400 taxable value → FBT of $2,346.47
• Operating cost saves $7,430.47 for the year

Mostly private use — 90% private

• Statutory: still $10,000, because the method ignores actual use → $9,776.94
• Operating cost: $12,000 × 90% = $10,800 → $10,559.10
• Statutory now wins, by $782.16

For this car the two are level at a private-use percentage of $10,000 ÷ $12,000 = 83.3%. The gross-up does not affect that point, because both methods run their taxable value through the same factor — it cancels out. Only the taxable values matter to the break-even.

Why the break-even moves every year

Now put the deemed amounts back in. Same $50,000 car, $8,000 of cash running costs, and deemed depreciation at 25% diminishing value:

Deemed interest would be added to the operating costs column, pushing every break-even figure lower again.

Two things fall out of that table, and neither is obvious from the usual framing.

The operating cost method is strongest when the car is new. In year one it wins for any private use below about 49% — a much wider range than the 83% the simple example suggested. By year four the break-even has climbed to 75%, because deemed depreciation has more than halved while the statutory 20% is still charged on the original $50,000.

Year five is a cliff, not a step. The base value drops to two-thirds of cost price, so the statutory taxable value falls from $10,000 to $6,666.67 in a single year and the break-even collapses from 75.3% back to 55.8%. A car that had drifted into statutory territory can flip straight back out of it.

You can generally choose a different method for the same car in a different FBT year, provided you hold the records for whichever method you use in that year. So the practical approach is to run both each year rather than deciding once at purchase.

The private-use percentage is higher than people think

Where the two methods cross depends on how expensive the car is relative to what it costs to run, so it is worth finding on your own figures rather than assuming.

The operating cost method only helps if the logged private-use percentage is genuinely low, and the most common reason it is not is the commute.

Travel between home and a regular place of work is private use. It does not become business use because the car is a work car, because you take work calls on the way or because you carry tools you also use at work. A car driven 20 kilometres each way to a fixed workplace and used for business trips during the day can easily be more than half private by kilometres, which is enough to put a mid-life car on the wrong side of the table above.

Genuinely low private-use percentages tend to belong to vehicles that travel between job sites, carry bulky equipment that cannot reasonably be left at work, or are garaged at home for that reason. If that describes the vehicle, also check whether it qualifies as an exempt vehicle rather than optimising the method — some utes, vans and other commercial vehicles are exempt from car FBT altogether where private use is limited to travel between home and work plus minor, infrequent and irregular other use.

The logbook, and the four ways it fails

Everything in the operating cost column depends on a valid logbook, and an invalid one puts you back on the statutory formula by default — usually at a much higher cost.

• The period is too short or unrepresentative. It must be 12 continuous weeks, and it has to reflect your usual pattern. A logbook kept over a period of unusually heavy business travel is not representative.
• It has expired. A logbook lasts five FBT years, and only while the pattern of use stays the same. A change of role or work location ends it early, whatever the five years say.
• The odometer records are missing. The logbook establishes the percentage; the odometer readings at the start and end of the FBT year establish the total kilometres it applies to. Both are required.
• A replacement car was not logged. Replace the car and you generally need a new logbook for the new one — the old percentage does not travel with the driver.

The statutory formula's only real advantage is that none of this can go wrong. For a car whose private use is high anyway, that simplicity is worth something on its own.

Type 1 or Type 2, and why the gross-up matters

The taxable value is grossed up before the 47% rate applies, and there are two factors:

• Type 1 — 2.0802 where the employer is entitled to GST credits on the benefit. This is the normal case for an employer-provided car.
• Type 2 — 1.8868 where no GST credit is available.

The difference is about 10% of the FBT bill on the same taxable value: $10,000 grossed up is $9,776.94 of FBT at Type 1 against $8,867.96 at Type 2. It does not change which method wins, since both run through the same factor, but it changes the size of the number by enough to matter to a budget.

Separately, the reportable fringe benefits amount on the employee's income statement always uses the Type 2 factor, whichever type applied to the employer's FBT. That amount is not taxable income, but it is counted in several income tests — including HELP repayments, the Medicare levy surcharge and family assistance — which is where a car benefit tends to surprise people.

Before you choose

• Work out the operating cost total properly, deemed depreciation and deemed interest included, or the comparison is not a comparison.
• Get the private-use percentage from the logbook, and count the commute as private.
• Recheck both each FBT year, particularly at the fifth, where the statutory base value drops by a third.
• If the car is electric, check the exemption first — it can take the FBT to nil and makes the method question moot. See the electric car FBT exemption.