Back in May, there were some changes to the way that FBT is calculated on Company vehicles. This has lead to a much simpler way of calculating the tax, but in the interim I have been asked many times how this impacts existing contracts, so below I will try and explain in plain English.
One thing is clear, there is no longer a benefit for those travelling large numbers of kilometres per annum because there is now one flat rate of 20% across the board.
HOW THE OLD STATUTORY FORMULA METHOD WORKS
Under the old statutory formula method, the taxable value of car fringe benefits is based on the cost of the car multiplied by the relevant statutory percentage. The percentage depends on the number of kilometres the car has travelled, taking into consideration the number of days in the year that you provided car fringe benefits.
Where the last commitment in relation to a car has been entered into before 7.30pm AEST on 10 May 2011 the old statutory rates will continue to apply, as outlined in table 1.
However, if a pre-existing commitment is altered, it may be considered a new commitment that is subject to the new arrangements.
|Total kilometres travelled during the FBT year (1 April 31 March)
|Old statutory rate
|Less than 15,000
|15,000 to 24,999
|25,000 to 40,000
HOW THE NEW STATUTORY FORMULA METHOD WORKS
The new flat statutory rate of 20% applies regardless of the distance travelled.
The new flat rate applies to all car fringe benefits after 7.30pm AEST on 10 May 2011, except where there is a pre-existing commitment in place to provide a car.
All pre-existing commitments will remain under the old statutory rates unless there is a change that would amount to a new commitment.
|From 10 May 2011
|From 1 April 2012
|From 1 April 2013
|From 1 April 2014
|Less than 15,000
|5,000 to 25,000
|25,000 to 40,000
So there you have it, plain and simple up until April 2014, but if you have any other questions relating to this, make sure you talk to the people at FinCar.
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Employee Contribution Method
Tuesday, 10 May 2011 08:06
The Employee Contribution Method (ECM) is an evolution of the Novated Lease product that was initially introduced as a method of payment for Executives and high income earners to save money (taxes generally) regardless of their job description.
The original Novated Lease was established using the Statutory Fraction Method, more commonly known as the FBT method for those people who fell into the highest marginal tax bracket.
However, since July 30 2008, the top marginal tax rate rose to $180,000 from $150,000 which reduced the glamour of this product to many people.
So as not to disadvantage these people from this fundamental shift in tax rates the (ECM) was implemented to maximise the benefit from vehicle packaging for PAYE tax payers under $180,000 (after packaging).
The ECM is a more tax effective arrangement for those under the top tax margin simply because the FBT method uses a formula that is based on the capital value of the vehicle, the statutory fraction and highest marginal rate; E.g. Capital Value X Statutory Fraction X 45% X 2.0647 (easy hey!!not)
Basically, if you are under the top marginal rate of tax and you want to package your car you can contribute to the value of the vehicle pre-tax and the running cost post tax; saving you the difference on the margin.
For every dollar the employee contributes to the running costs of the vehicle they reduce their FBT liability of the vehicle by the same amount. So you are substituting the FBT costs for standard tax.
As a rule of thumb, you will save (on spending) approximately 10% of the value of the car each year. It may not seem too much, but if you purchase a $30,000 you will be about $3,000 per year better off than with the Standard Novation agreement. That is definitely better in your pocket than the ATOs!
Ask the people at FinCar for more information on ECM when you call.