Avoiding Financial Meltdown Over Christmas

It’s only a month out from Christmas, and there is probably some justification for hearing carols and seeing decorations around in the shops. The advertisers are out to get you, touting the latest must-have and pressuring you to buy this that and the other thing to buy, buy, buy for the kids, your wife/husband/partner, your parents, your siblings, Aunty Sally, the cat, old Uncle Tom Cobbleigh and all.

It can be very hard to resist the siren call of the advertisers. However, if you’re either considering taking out a loan for a new car or if you already have committed yourself to a car loan, you have to be really canny in order to resist the pressure and keep on top of things. January can be really hard for some people as the credit card bills come home to roost or when there’s not as much money in the bank account to cover the repayments for the car. Even if you are one of those lucky people who has got a car through a novated lease agreement, the whole commercialised Christmas thing can be a drain and a pain.

But you don’t have to turn into Scrooge and write the whole season off as a lot of humbug. You can enjoy the fun of Christmas and buying treats for people you care about  without blowing the budget. Your role model from Charles Dickens’s short story should instead be the Cratchett family  cheap and cheerful.

However, this sort of thing often has to be planned in advance, especially if you’re going to try to save a few pennies here and there. So as there’s a month to do, here are some ideas:

  • Everybody who will be at your Christmas celebration on the day itself has to buy one present for one other person. Pull names out of a hat to work out who buys for whom, and set a maximum dollar limit on the value of the gifts. It’s amazing what you can pick up for $10 if you look.
  • Buy gift cards for your nearest and dearest, then hit the shops during the New Year and Boxing Day sales when everything drops in price.
  • Do a little DIY and make gifts for family members. Things that work well in this category include edibles and growables, plus a few cosmetic thingies. Edibles include chocolates, biscuits, cakes, jam and home brew wine if you’ve been really organised. Growables include any pot plants and veggies (and right now is a good time to get seedlings going ready for the day). Cosmetic things include bath salts, bath bombs and herbal vinegar toner. Plenty of how-tos are available online or in the local library. Even more organised people can try their hands at other handcrafts.
  • Also make your own Christmas cards. A bit of coloured paper, a few magazines or other things you can cut pictures out from, the odd bit of glitter and away you go!
  • Give vouchers or coupons for services that family members can redeem during the year. These can include babysitting, washing the car, mowing lawns, makeovers and (for appropriate people, of course!) something X-rated.

It can be tough to resist the pressure and to refuse to buy into the massive overspending culture that surrounds this season. It’s easy to be guilt-tripped into buying more than we can afford and blowing the budget, but it’s just not worth it. Keep your eyes fixed on what’s important and on real happiness  and that can’t be bought. You can’t even take out a loan for it.

Loan Repayment Insurance

These days, a number of loan companies and banks make taking out loan repayment insurance a must when you take out a loan with them to purchase a vehicle. I remember the first time I came across one of these things. I started wondering what the heck they were and why on earth I had to get this policy  and the more cynical part saw this as yet another money-making scheme on the part of the lenders.

The idea behind loan repayment insurance works more or less like this: if something happens to you that means that you can’t meet the loan payments, the insurance will cover the payments for you. And these things do happen. People lose their jobs, have accidents, get sick and die (the latter tends to saddle the surviving significant other with the debt, especially in the case of joint ownership). Now, if you’re already up to the neck in debt  mortgages, other hire purchase agreements and credit card debt  this can be a handy thing to have up your sleeve, as it means that the repo people aren’t likely to turn up and take your car away.

On the other hand, if you’re more of a frugal type who usually avoids debt as much as possible and is pretty good at budgeting so you meet your commitments, it can be more of a nuisance. Not only do you have to pay back the loan and the interest but you also have to pay the insurance premium and sometimes this premium is included in the principal amount borrowed so you have to pay interest on that as well.

As always, you need to read the fine print very carefully before signing anything, and that includes a loan repayment insurance policy. For example, if you aren’t currently in paid work or if you are self-employed, you won’t need redundancy cover (self-employed people can’t fire themselves).

However, as mentioned earlier, they are often compulsory and in the case of some lending institutions, you can’t get a car loan without one. They can even get a bit sneakier, calling the policy lifestyle protection insurance and guaranteeing to keep up your current level of income even once you’ve finished paying off the loan (this was the case with the one I was involved in). Politeness kept me from unleashing my inner Scrooge in fury at the slick, smarmy salesperson and letting him know that I lived by the policy of cutting my coat according to my cloth and knowing that you can’t expect champagne on a beer budget.

In the end, I got out of that nuisance policy by paying off the loan as quickly as possible (I had chosen a loan that allowed me to make lump sum repayments and pay the loan off early to minimise the interest we paid) and then cancelling the damn policy. It’s something that I recommend doing. You could also try the following if you don’t like the idea of this insurance:

  • Hunt around to find a lender who doesn’t have this requirement (let us know about this and we’ll do the hard work for you).
  • Amassing as large a deposit as possible to minimise the amount you borrow and thus the amount you repay  and also the size of the weekly payments.

You may, of course, be in a situation that makes this sort of insurance attractive. In this case, don’t forget to ask as many questions as possible, even if you feel stupid asking them.

Relax, Everybody!

Just when we thought we were getting the hang of what was going to happen with the new fringe benefit tax system, and those of us who were lucky enough to go ahead and get a car through a novated lease scheme (thanks to our employers) were learning how to go about using logbooks, we had an election that resulted in a change in government. And the proposed changes to the rules which were anything but popular  were scrapped.

So, breathe a sigh of relief, everybody. Stop scratching your heads over how to fill out a logbook and working out what is and isn’t a business trip. We can all go back to using the most common method of calculating the fringe benefit tax we have to pay because we’ve got the perk of a car.

You won’t be the only people breathing a sigh of relief. The proposed rule changes were very bad news for Australia’s car sales industry, as a lot of business is created by our novated lease system. It ensures a lot of turnover  which isn’t just good news for car sales people but also for road safety and our car manufacturing industry. When people get a new car under a novated lease scheme fairly easily, this means that they’re less likely to stick with some old rustbucket that doesn’t have as many safety features as a new modern car. This means that Australia’s roads are more likely to have lots of safe cars with all the protective gadgets on them, which means safer roads and fewer accidents.

It’s also good news for smaller businesses and charitable organisations. Often, these employers want to keep hold of their best workers but don’t have the budget in place to provide other incentives and rewards. Including a car in the salary package is an easy way for these people to reward and retain the good people  it’s so much easier than trying to pay them more, which may be a disincentive for some employees, as it means that they pay much more tax when they pop over a certain threshold.

Of course, logbooks haven’t been scrapped altogether. Some people were on the logbook system before the proposed changes came in anyway. They’re still going to be doing things the same way, and are probably the only people who aren’t breathing a sigh of relief (but if you’re in this category, you can stop feeling smug).

Some people felt that the reaction from the car leasing and car sales industry was a bit over the top. After all, it’s not as though the proposed changes were planning to scrap novated leases altogether. Companies could still create salary packages involving new cars as a way of rewarding their best employees; the only real difference was that people were going to have to keep logbooks and use them to calculate the amount of fringe benefit tax they would have to pay. And after the initial shock and downturn, the car sales and lease industry would have bounced back once we were all used to the new way of doing things. But who’s to tell now? Who knows what would have happened?

The good thing is that we can now carry on as normal. And no matter whether you’re considering setting up a novated lease agreement or whether you’re just considering taking out a loan to buy a new car, we’re here to help you find what you need.

Business or Personal?

The recent changes in the rules about Fringe Benefit Tax will mean that all vehicles that are involved in a novated lease as part of a salary package will need logbooks so the people with them pay a fair amount of fringe benefit tax.

Your company accountant will probably give you a brief run-down on how to fill out a logbook and give you a few basic pointers about what is and what isn’t considered personal use. However, we thought we’d give you a few case examples to help you wrap your head around the concepts.

Case 1: Stephanie works at a small retail store. She uses the car that is part of her salary package to drive to work, obviously. The trip to and from work is considered to be a personal trip (and considering that Stephanie drops her children off at school on the way to work in the morning, most of us would think that this is fair enough. This trip goes into the logbook as a personal trip, therefore. From time to time, Stephanie has to meet up with business contacts such as suppliers and wholesalers to talk over a new deal. Driving to meet these people counts as a business trip and Stephanie can certainly claim this amount back against tax. Occasionally, the boss asks Stephanie to deliver a purchase to a customer using her car. Again, this is considered to be a business cost. Usually, the journey home is a personal trip but if the boss has told Stephanie Hey, the person who put in this order lives over in your part of town  could you drop it off to him on your way back home, then this would count as a business trip. Naturally, all the trips Stephanie makes in the weekend and doing the Mum’s taxi runs are personal trips.

Case 2: Gary works for a contracting crew. Usually, he drives in to work and parks his car (part of his salary package) up for the day at headquarters before piling into the work van with the rest of the crew to head out to the various sites the contracting work is done on.As you may have already figured out, the trip to HQ is a personal trip. However, if something crops up that means that Gary and a couple of workmates have to nip over to another site while the main work van goes elsewhere, and they have to take Gary’s car, that counts as a business trip. And if the foreman asks Gary to go and pick up a few edible treats from the supermarket on Friday afternoon for a special end-of-the-week feed, and Gary uses his car, this is a business trip, too, even though Gary picks up a few groceries for himself at the same time.

Case 3: Kathy is a social worker and counsellor who works with troubled teenagers. The organisation she’s associated with has an office, where she sometimes does her counselling work and where she touches base with the others in the organisation. As you probably have guessed, her trip to headquarters is a personal trip. However, she also goes out to quite a few high schools to meet with her counselees and has even been known to meet with them in the evenings. All these trips are business trips. If she decides to take a group of the teenagers she’s working with out to the movies as part of her work with them, the trip to the cinema is also a business trip.

Case 4: Jeff is a sales representative and drives a lot from client to client. The chances are that he won’t be getting a car as part of a salary package, as those who do lot of driving for business purposes don’t usually get a set of wheels under a novated lease.

The Rules, They Are A-Changing

The recent changes in the fringe benefit tax rules are making things very difficult for employers, employees, loan brokers like us and car dealers. The way Australians buy cars is changing and employers can’t use their default solution for keeping and rewarding their valued employees. The changes will affect all new novated leases set up from the 16th July 2013 onwards.

There are a few people who won’t be affected. If you are self-employed or a sole trader who uses their car for work purposes and claims back a few travel expenses, nothing’s going to change. If you’re an employee who uses a car that belongs to the company and you use it nearly all the time for work purposes (e.g. if you’re a sales rep who has to travel to your clients) then things aren’t going to change for you, either. And if you have an existing salary package that involves a novated lease, everything will stay the same under the current lease and the changes will only affect you when the current lease expires and a new one starts.

The changes apply to novated leases as we know them  the situation where a company sets up the lease for a new car that their employees can use as they wish, and the payments for the lease are taken out of the pay packet before tax so the employee gets the perk of a new car but stays in the same tax bracket and doesn’t have to fork out any more income tax although they will have to pay fringe benefit tax.

Under the old system, there were two ways of calculating the amount of fringe benefit tax that someone had to pay. You could choose to keep a logbook and record all your trips, along with whether or not it was a business or personal trip, and the proportion of personal to business trips was used to calculate the amount of fringe benefit tax to be paid. Or else you could just use a formula based on the cost of the car times 20%, and there was no need for logbooks.

Under the new system, it’s logbooks all the way so you pay fringe benefit tax for the personal use of the car. The irritating thing about this is that the trip to and from work is considered to be personal use rather than a work trip. One of the headaches for employees and employers alike is that the new system requires a lot more paperwork. The idea is that people shouldn’t be claiming back more expenses than they are actually entitled to and should pay the right amount of fringe benefit tax.

The Rudd government thought that keeping logbooks was going to be the only change that people would really be affected by (as if that wasn’t enough hassle in itself!) but the economy as a whole seems to be affected.Car companies, especially companies providing company cars, are not selling/leasing as many vehicles, as a lot of people don’t want to set up a new lease under the new system. Some employers are left scratching their heads as they try to think of other ways to reward their staff and keep them in the company that aren’t going to cause headaches and hassle after all, having to write down every single trip to the dairy and every single Mums taxi trip is not that much of a perk for a busy person trying to juggle work and family. Charitable organisations are also affected, as salary packaging deals are the only way that they can reward their employees on a tight budget.

It’s going to be a case of watch this space, as there’s a lot of opposition to the changes and further changes may be in the wind.

In the meantime, if you are on the lookout for a new set of wheels, don’t forget that ordinary regular car loans aren’t affected by these changes at all.