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!

Questions About Novated Leases

Q: Can you get a novated lease for a second hand car?

A: Yes, you can get a novated lease on a second-hand car. Usually, lease agreements are used to purchase and finance new cars, but there is no reason why you can’t get a second-hand car under a novated lease agreement. OK, it’s probably not the best idea to get an old banger under a novated lease agreement  you probably don’t even need a loan for an old banger. in some cases, you can get the car you’ve already bought and are in the process of paying off switched to a novated lease through a sale and lease back agreement, where you get the equity you hold in the car back in the form of cold, hard cash and the car itself becomes part of a salary package.

Q: Can you get any sort of car under a novated lease agreement? Are there any limits?

A: This really depends on your boss and the company finance whizzes, as different workplaces have different rules.Ultimately, there isn’t really any limit on the type of car you can get, but realistically, you are probably best not to get some super flash sports number like a Lamborghini brand new. The repayments on that are going to be a bit on the high side for the average Aussie office worker, even as part of a salary packaging deal. However, in most cases, it does have to be a car rather than a truck or a motorbike. You will need a personal loan if you want to own and drive one of these (or, in some cases, the business might get out a business loan for a company-owned truck or motorbike, depending on the business in question).

Q: My boss has offered me a package that includes a car with a novated lease agreement. Does this mean that the car in question can only be used for business purposes?

A: No. You can use the car for whatever you like  going on holiday, taking the kids to school, going shopping, visiting grandma on the other side of town, you name it. That’s one of the good things about novated leases. In fact, novated leases work better if the car under the lease agreement is mostly used for personal purposes. You may or may not have to keep a logbook of kilometres driven if you use the car for a mix of business and personal, depending on which Fringe Benefit Tax method your workplace uses, so ask them about this.

Q: Aren’t novated leases only suitable for people at the top of the corporate ladder with great big salaries who want to drive the latest luxury models of car?

A: No. Novated leases can work for everyone and for every sort of car. Anyone can benefit from a novated lease agreement as part of their salary package, though the amount saved in tax will depend on the value of the car, the number of kilometres you drive and your gross salary.

Q: Will a novated lease be suitable for everyone?

A: Novated leases work for most people. However, for people who have to drive a lot for business purposes (and driving to and from work is not considered business purposes) might be better off with a vehicle owned entirely by the company rather than a vehicle financed under a novated lease agreement.

Fringe Benefit Taxes And Your Novated Lease

If you don’t have an accounting background, understanding all the ins and outs of fringe benefit taxes and how they apply in the case of a novated lease on your car could drive you towards another sort of fringe  the lunatic fringe.

A novated lease is considered a fringe benefit and is subject to fringe benefit taxes, same as any other sort of non-cash perk that comes as part of the job. Under a novated lease system, the company you work for is leased, technically speaking, by the company, although the costs are passed on to you and are taken out of your salary package before the pay cheque hits your bank account. And the use of a car leased primarily by the company for private purposes is considered a fringe benefit. (In case you’re wondering, being allowed to take home the scrap paper from the photocopier so your kids can draw on the back, or getting to take home the sandwiches that weren’t eaten at the staff lunch aren’t fringe benefits, even though you might consider them a bit of a perk.)

The good thing is that your company’s accountant will take care of all the fiddly side of calculating fringe benefit tax and will take it out of your salary, much the same way that he/she handles the normal tax bits. So you don’t really have to worry.

You may or may not have to keep a log book, depending on whether your company prefers to use the Operating Cost Method or the Statutory Formula Method. The Statutory Formula Method doesn’t take any notice of whether you use the car for private or business use, but just uses a percentage multiplied by the cost of the car to work out what your fringe benefit is worth. It’s usually about 20%, although the method of calculating this has been changing over the last few years. At the time of writing, it’s 20% unless you travel more than 40,000 km in a tax year, in which case it’s 17%. From 1 April 2014, it’s all going to be 20%. A lot of employees like this method, as it’s a lot easier from their point of view.

If you have to use the Operating Cost Method, you have to keep a logbook of your driving so the bean-counter in the office knows how many kilometres you drove for business and how many you drove for private use. In this context, remember that the drive to work in the morning and back home again in the evening counts as a private trip. However, if you had to take your car out to ferry a broken computer to the fix-it whizzes, or if you were asked to go and pick up the visiting consultant from the airport, this would count as a business-related trip. The number of kilometres you drive for business and for personal use are used to calculate what your fringe benefit is actually worth.

If you have a lot of driving to do as part of the job, e.g. for sales or as a mobile consultant or something like that, then a novated lease probably isn’t the best option for you. And you will have to keep a logbook all the time.