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.

New FBT Rules

Here is some food for thought about the new changes to Fringe Benefit Tax and Carbon Tax. It would be best that before you make any big decisions regarding this new information that you first see what your accountant says, and do have a talk to us if this new information raises any questions because we are a specialist car finance provider.

For many, the reinstated PM Rudd has been a good move forward for Australia in its current economic and political situation. However, the newly proposed changes to Fringe Benefit Tax and Carbon Tax that PM Rudd has announced hasn’t made for great news if you happen to be in the car lease industry. On July 16th PM Rudd suggested that an Emissions Trading Scheme would replace the carbon tax, and as part of this change there would be a $1.8 billion cut in Fringe Benefit Tax concessions. The main reason for the change was stated by Joe Albanese, the Government Minister for Transport, who said that There’s a lot of people clearly fiddling the system. Those people who are salary sacrificing who use their car less than 20 per cent but claim the 20 per cent offset  less than one kilometre in every five they actually use for work  the chances are it’s not a Holden Commodore; it’s a BMW. The big deal is that under current measuring methods, Fringe Benefit Tax is calculated at 20 per cent of a vehicles cost, regardless of whether the car is used for private or business use or private use via the salary sacrifice, with the assumption that the car is being used for predominantly business use anyway. The more expensive a car, the larger the portion claimed in Fringe Benefit Tax.

Added to the cuts in Fringe Benefit Tax for new car owners, a potential extra cost of around $1400 per year per vehicle could make the car leasing environment a whole lot less attractive for someone who might be on the lookout for a new set of wheels predominantly used for business, with a small portion of the vehicle being run for personal use. Some would say that this bleak outlook could well stop the car lease industry in its tracks.

Again, the new changes bring in the requirement of a far more comprehensive log book keeping system of the vehicle’s use. In order to make sure that the kilometres a car travels for work and personal use are tracked more accurately, recent new technology has made it possible to get a much more precise value for both work and personal use over a twelve week period. According to Federal Climate Change Minister Mark Butler, The Government had considered the FBT changes very carefully. It’s not the same as it was in the 1980s. You can download these very easy apps that use GPS systems to do the work all for you.You effectively just press the button, let it go and after you’ve finished marking that travel or recording that travel over the 12-week period every five years it can be automatically sent to your employer or your tax agent. Using the on-board GPS systems inside new cars for tracking mileage is also a simple and effective way of gathering data for emissions.

While the changes do have some great benefits in ensuring that the system becomes much harder for people to cheat, the Shadow Minister for Transport, Joe Hockey, stated that This is going to be like a baseball bat to the motor vehicle industry in Australia. This is poorly thought out. There was no consultation with any stakeholders.

Mr Hockey pointed out that 75 per cent of recipients of a new company car earn less than $100,000 a year, and that they were going to be hit with a tax bill of $1400 a year, every year, going forward.

It is this sort of change that will make people think twice about leasing a new vehicle for the business fleet. The Federal Chamber of Automotive Industries has responded with CEO Tony Weber claiming that: The changes undermine the long-term certainty the FCAI and its members have called for from government, and threatens to affect around one-third of new car sales in Australia. The effects will flow right through the industry, including to dealerships and service centres.

Though new log book-keeping technology could make it easier, the changes ignore the fact that the costs involved to companies to process manual log book keeping processes will result in the forcing of higher prices for new vehicles, more real-time paperwork and the potential to damage the 80% fleet market sales that Australian car makers have. These effects would be disastrous, and the changes have already caused one major fleet vehicle purchaser to freeze their order, pending any further developments.

Everyone loves a new car. A new fleet is not only great for business marketing they are essential for the smooth operation of a new working business fleet. It’s essential that you are kept in the loop with regards to the new changes, and, as stated at the beginning, please consult your accountant for information, and feel free to give us a call to further help you to clarify this new legislation so you can best decide what’s best for you.

Fringe Benefit Tax Explained

If you’ve been one of the lower level workers who’s just had a pack packet to take home with the PAYG taken out of it already up to now, it can be a bit bewildering to hear all the talk about FBT or Fringe Benefit Tax for the first time. If the new salary package involves a novated lease for a car, you’ll definitely hear the term being bandied about.’ There you are, just moved up the corporate ladder to a new position with a nice salary and a few perks like a great new car, and they’re talking about this new tax. You could just tamely accept it and let the accounting people sort it out (they will). Or you could ask a few questions.

In short, a fringe benefit tax is a tax on the non-cash perks that you get with your job. Technically, although this should include things like the boss saying that you can take a couple of big cardboard boxes home for the kids to play houses in, it doesn’t. If the company is giving it to you instead of putting it in the bin, it isn’t a fringe benefit and can’t be taxed as what you are technically being given from an accountant’s perspective is rubbish worth nothing (tell that to the kids playing for hours in a big box). Fringe benefits are usually things like the use of a car for private purposes (one of the most common ones), a low-interest loan from the company, accommodation provided by the company, getting free car parking so you don’t have to use the metered parking down the road and so forth. If you get it as part of the job on a regular basis instead of getting a salary raise, it’s a fringe benefit and will incur a fringe benefit tax.

If you’re uncertain about whether something is or isn’t a fringe benefit, then ask your accountant, who will probably explain what is and what isn’t a fringe benefit  it’s his or her job to know. But one thing is for certain: if you are getting a car that you can use for whatever you like whenever you like via novated lease where the repayments come out of your pay packet before the tax is calculated, then this is a fringe benefit.

It’s easy to understand why fringe benefit taxes are imposed if you put yourself mentally down the ladder again. Chances are you look at what your supervisors and the other higher-ups get and start grumbling: Look at what they get  a free car park right by the door while us lot down the bottom have to pay to park the cars. And they get the ruddy car as well for diddly-squat, really, while we have to pay for our own cars. It’s not fair.Fringe benefit taxes make things a bit fairer, recognising that the perks are worth something and ought to be taxed just to level things a wee bit. Here, we could get into a huge political debate, but we won’t!

If you have any other questions about fringe benefit taxes and novated leases, don’t hesitate to ask us.

If you’re new to the workforce or to Australia, you might well be scratching your head about what’s what with novated leases. So to help you understand, let’s give an example with a fictional employee, a woman we’ll call Jodie.

Jodie has been working for her employers for quite a few years now, and does a fairly good job of juggling the dual roles of being a parent and being a good worker. Her employees are thinking about giving her a raise but they know only too well that Jodie’s car is getting a bit ancient. They also know that Jodie probably doesn’t really want an actual increase in her take-home income, as this would put her into a new tax bracket and make her ineligible for the Family Tax Benefit. So they decide to offer Jodie a novated lease to (a) reward her for her hard work and dedication to the job and (b) help her replace her little old early 90s Toyota Starlet with something a bit more up-to-date that would suit a family with growing children.

So Jodie and the employers set about the process of setting up a novated lease. Jodie gets to pick the sort of car that she would like to get through this scheme  in the end, she picks a Nissan Dualis SUV with a bit more space than her little old hatchback. Now Jodie, her employers and the finance company providing the lease all sign an agreement that says while Jodie is the official owner/lessor of the SUV, the employers are responsible for putting through the repayments.

The amount of the repayment will be taken out of Jodie’s before-tax salary, along with the fringe benefits tax and maybe the vehicle running costs, depending on the actual terms of the novated lease. This gets taken out before PAYG is calculated, and it’s the amount that PAYG is calculated on that affects how much tax Jodie pays and how much Family Tax Benefit she gets. The amount that Jodie takes home is the same as it was before the novated lease was set up  but she also gets a new car with all the payments taken care of!

Everybody is happy. Jodie is happy because she gets the benefit of a new car  with no need for logbooks and the ability to use the car for whatever she wants to  and she still pays the same amount of income tax as she used to  and she gets that Family Tax Benefit. The employers are happy, because they know that Jodie is now more likely to stay working for them for longer  if she leaves, she’ll have to shoulder the cost of the repayments herself as it’s her car, not the company’s. And the finance company is happy because they know that the payments on that car are going to come through regularly from an entity that’s more dependable than a private individual. And I guess that Jodie’s kids and partner are going to be happy, too, with the roomier set of wheels!