Changes to FBT rules

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.

Table 1

Total kilometres travelled during the FBT year (1 April 31 March) Old statutory rate
Less than 15,000 0.26
15,000 to 24,999 0.20
25,000 to 40,000 0.11
Over 40,000 0.07

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.

Statutory rate

Statutory rate
From 10 May 2011 From 1 April 2012 From 1 April 2013 From 1 April 2014
Less than 15,000 0.20 0.20 0.20 0.20
5,000 to 25,000 0.20 0.20 0.20 0.20
25,000 to 40,000 0.14 0.17 0.20 0.20
Over 40,000 0.10 0.13 0.17 0.20

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.

Add new comment

Employee Contribution Method

Interest Rates

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.

The right Residual Value or Balloon Payment for you

When you have made the decision to either take out a lease, be it novated or otherwise, or a commercial hire purchase you are inevitably faced with the decision about the size of this end payment and what impact it has on you now and in the future.

The impact is an obvious one. The higher the residual (or balloon), the lower your monthly payments will be and the lower the residual (or balloon), the higher the monthly payment will be. Simple! You would think

So, where do you set this figure?

Firstly there are some minimum guidelines set out by the ATO, which are:

12 months

65.50%

24 months

56.25%

36 months

47.00%

48 months

37.50%

60 months

28.25%

Secondly, and most importantly ask yourself honestly how many kilometers you will be driving each year. Forget about how many of them will be business kilometres for your FBT calculation, you need to know how many kilometres will the car have travelled at the end of the lease, when the residual (balloon) will be due. This will have a direct impact on the end value of the car; the lower the km increases the balloon, the higher km will decrease it.

The average, if this figure actually exists, is somewhere between 15,000 and 20,000 km per annum for a working person who uses their vehicle for business and pleasure. Approximately 60,000 – 80,000 at the end of a 4 year lease/CHP.

Ideally the value of the car will be equal to the residual and then you can go on your merry way and start the process all over again with your new car.

The good news is that if you have kept the kilometers down and looked after your car, then there is a chance that your value will be more then the residual and you will come out with a profit perhaps a deposit on the next vehicle to keep the cost down even more. But sadly for far too many people, they end up in the worst case scenario, where the value if the car is much less than residual and they have to come up with the balance before they can move on to the next car and often this amounts to thousands of dollars.

I have seen this happen in many, many cases. Even worse is that people manage to get the financier to fund this shortfall in the new car. All that does is defer the obvious pain for, say, another four years and usually the amount is then even greater.

Not so long ago, it was a practice by unscrupulous Dealers, Brokers and Lenders to convince people to take out 5 year loans, with 50% residuals, particularly with high end prestige vehicles. They are not alone in this conspiracy, many car buyer are too focused on the immediate purchase rush and prestige of owning a new car with only a monthly budget in mind – that they ask for the worst case scenario.

There are still some people are still paying off the balances! There is not a car on the market that is worth 50% of its value after 5 years, particularly in the Prestige market!

Far better is to be sensible and rational and set as low a residual as possible which will then give you a chance to sleep easy during the course of the loan. It is an ever changing depreciating asset and a useful transportation tool. You can’t curl up to a car at night.

The simple and painful adage is, If you can’t afford the combination of a sensible residual and the associated monthly payment, then you cannot afford the car you are aspiring to. Buy something cheaper!

Do your homework, check what cars are selling for with those kms on them remembering that you must compare apple with apples. The right kilometers, style, model and engine size car (and not expensive accessories) and base your thought/figures around that.

Finance Terms to Remember

In this day and age of the internet and moving market prices on everything from milk to homes it is sometimes wise to sit back and revisit the basics. This is true in the motor vehicle financing area as well. When we decide that we need a new vehicle we also have to decide how to pay for it. This can be confusing if you dont know what each of the basic financing terms mean to you and your situation.

A CAR LEASE (or FINANCE LEASE) is a commercial finance product which enables you to have use of a vehicle and all the tax and personal advantages of ownership, while the financier actually retains the ownership of the vehicle.

The entire price of the vehicle is leased in this situation. Generally there is a residual value payable at the end of the term which has the effect of reducing the monthly payments when compared to a secure loan. This residual should be similar to the value of the car at that time. Be aware of falling for too high a residual. This may have the effect of lowering the monthly payments, but there is nothing worse than having a payout of say $20,000 when the value of the car is $12,000 because you will have to come up with the $8000 difference! Far better to have a lower residual and higher payments and if you cannot afford it, buy a cheaper car!

In terms of tax deductions, your claim is generally for the monthly payments

A COMMERCIAL HIRE PURCHASE (CHP) is a commercial finance product where you hire the vehicle from the financier for a fixed monthly repayment over a set period of time. At the end of the term when the total price of the vehicle (which includes all interest and/or residual (called a balloon payment in this type of finance)) is paid you take ownership of the vehicle.

A deposit can be used in a CHP to reduce the payments or final payouts.

In terms of tax deductions, your claim is generally for the interest paid and the depreciation per annum.

A CHATTEL MORTGAGE is a commercial finance product where the customer takes ownership of the vehicle (chattel) at the time of the purchase after the Financier advances funds to you for the purchase.

The financier takes a mortgage over the vehicle as security for the loan, by registering a Fixed and Floating Charge with the ASIC. When the contract is complete the charge is removed and you have clear title to the vehicle.

People/companies who are registered for GST can claim the GST in their BAS and there is no GST applied to each monthly payment.

A NOVATED LEASE is a method of salary packaging a car, which an employee leases a car which the employer agrees to pay the monthly payments in pre-tax dollars while they are employed with the company.

This leasing option allows for finance mobility for the owner and control over the maintenance and fuel purchasing.

A PERSONAL LOAN is simply that personal finance product where the financier lends the customer unsecured funds to purchase a car for a set period of time with either fixed or variable rates.

This product is best for those looking to finance a vehicle out of the normal lending criteria’s (used vehicles, small value vehicles and private use vehicles).

Put your finances in place first

The New Year always seems to be a good place for great ideas, but many of us fall to the way side too quickly and easily as we discover that the idea was solid, but the intention was not.May we suggest a new plan of attack.

1. Make that list and keep it for a while.

2. Then stage two is to see what you have actually done and cross it out. The rest well, generally you won’t do no matter how hard you mentally kick yourself.

3. Take that list and make another one-but this time of places, institutions, friends, companies that can do it for you!!!

4. Recognise that it is almost March. If you really wanted to make a difference in 2011 then it is almost too late, so get on with it!

Passing on some responsibility for things you really have no idea about can be very liberating. Things such as mortgage reductions, superannuation, life insurance and motor vehicles with salary sacrifice. Most of us need professional help in these areas as we have paid the price too often by listening to friends.

This is especially so nowadays in the highly regulated world in which we live. The rules have changed for just about every category and are continuing to change on a daily basis.

In the world of Motoring there is a lot of interest in turning to Brokers both for the car purchase and the financing, for the ease and peace of mind that comes with handing over the reins of something you really couldn’t care to face on a day-to-day basis. These people are experts and are buying and financing hundreds of cars every month, not once every 3 or 4 years like most of us and they are aware of the pitfalls and the requirements of individual lenders. They are also up to date with the latest new car model releases and where to get the best deals.

Let’s face it; there are far better things to do with our lives than visiting multiple car dealers on the weekend and then ringing round to get the best finance deal.

Surely it makes more sense to get your finances in place first. Tell your broker what your maximum budget is. This is usually determined by what you can afford per month. Then advise how many kilometres you expect (honestly) to travel each year and how many will be business related. How long would you like to keep your car? Bearing in mind that the best resale value is to be had when the car is still under new car warranty and without high kilometres.

Why are these questions so important? Simply because nobody wants to own a car in a couple or three years time that is worth much less than the finance payout at the time. Let your broker provide you with the best mix of term and residual/balloon payment based on your answers to these questions.

Once you determined monthly affordability, kilometres travelled per annum couple with the relevant residual, then this will equate back to a maximum amount financed and consequently the maximum price of the car you can reasonably afford. Then get the finance approved for this amount. Simple really!

Believe me, there is nothing worse than wanting to own a BMW when your monthly budget only stretches to a Holden.

This also stops you being talked up by a car salesman and ensures no buyers remorse after the purchase you cant afford!

Low Credit Ratings and Financing- The Pitfalls

The combination of the economic downturn in the past few years and the propensity of Australians to hold a lot of credit card debts have left many good individuals with bad/low credit ratings. Having poor credit is something you can live with generally by paying cash. Then there are the big ticket items that at some point need to be purchased. For most people, the purchase of a family car or work vehicle will require you to obtain a loan. This can be an issue, well it is an issue. The banks have certainly made it nearly impossible for you to borrow money at any point when you have bad debt -don’t dismay there are financial institutions out there that will provide a good quality service to you albeit at a price.

In the current economic climate automotive loans to those people with bad debt can actually be easily obtained; even more so than in the past. Car dealers have also been affected by the economic slowdown along with everyone else, and they are more willing to offer deals on finance, even to those with poor credit.

The treacherous part of borrowing money when you have poor credit is that the conditions of offer can make the transaction not at all beneficial to you. Here are some things you may encounter when searching for finance with a poor credit history:

High Interest Rates Without a doubt you must be aware that you will pay a higher interest rate than someone with good a credit history. The rates can vary dramatically, so stay vigilant and research financing before you are prepared to purchase. This way you can have peace of mind that your interest rate is the best available for the time.

Loan approval fees Some lenders have taken to making money off people without really providing a service. They will charge you a fee just to submit the application for the loan and refuse it, and keep your payment. These are very disreputable practices and you should refuse any advice to apply if there are initial fees for application. Most companies permit you to apply for free, and then charge a fee to process the documents if you wish to proceed. Remember to make sure the interest rate is appropriate, not sky high. If the standard interest rate for good credit is 9%, then you would expect to pay between 10.5% and 12% – not 21%.

Strange loan terms You must be aware that you need to take the time to read the documentation. You may not understand it all. Don’t be afraid to highlight and ask questions and expect a truthful articulate answer. If the dealer or finance company um and uh then refuse the loan. It may be at their interest rate, but it is still your purchase. Check for terms regarding missed payments; you may not be allowed to miss even 1 payment before repossession. And many times the error could be at their end with the bank not removing the funds from your account to theirs on a certain day. Through no fault of your own you could be carless and in even more bad debt.

In saying this, most lenders are trustworthy individually or institutions as they are governed by some very strict codes of practice themselves. When shopping for a car loan shop around to make sure you get what you pay for and purchase finance that works for you. Talk to the people at Fincar first. They are there to help you.