Managing The Budget Over Christmas

Christmas is a-coming, and it’s one of those things that you have to factor in when you’re working with a budget… and you should be working with a budget if you are considering taking out a loan for a car, bike or boat (yes, even if you are buying said car, boat or bike as a Christmas present!).

Often, when people first calculate a budget to see what sort of weekly payments can be managed for your loan repayment, they can overlook events like Christmas and birthdays, which do require a little extra expenditure. And then that time of year comes around and the pressure can start coming on. It can be tempting to overspend and possibly max out your credit cards in order to have the perfect Christmas.

However, if you cut through the hype and are smart, then you can avoid blowing your budget over this time of year and facing the choice between defaulting on a loan repayment  with all the nasty hassle that comes with this  or eating baked beans for a fortnight. (If it gets to that level, choose the baked beans. They’re good for you as well as being ultra-cheap, and it’s easier to repair the social damage caused by blowing off than the credit damage caused by blowing your credit).

First of all, remember that Christmas doesn’t have to be perfect as defined by advertisers and movies. You don’t need a huge turkey or ham for Christmas dinner, plus all the heavy food of a Northern Hemisphere Christmas. In Australia, we’re lucky enough to be able to have Christmas in the veggie growing season, so make the most of cheap seasonal veggies or even home grown veggies and built your Christmas dinner around that, with the meat being a sideshow.

And presents don’t have to be the biggest, best, flashest and most fashionable. It’s a clich, but it really is the thought that counts. Try home-made treats and gifts if you’re good with your hands (sweets, jam, biscuits, cake, photo frames, etc…) or vouchers offering your services (washing cars, mowing lawns, babysitting, weeding, cleaning) that can be redeemed throughout the year. Or set a maximum limit and see what you can find for under a certain price  it’s amazing what you can find if you use your imagination.

Other tips to help you fit Christmas into your budget are:

  • Join a Christmas hamper scheme or voucher scheme through your local supermarket  this does trim down the food budget.
  • Buy presents bit by bit through the year rather than in one big hit. This spreads the cost out, allowing you to fit present shopping around your repayments. October and November can be good times to start. (Oops  bit late for that one now!)
  • Buy presents for families as a group rather than individuals. This is especially good if you have masses of relatives.
  • Make your own Christmas cards  after all, you can get enough pictures of Christmas-related stuff on the catalogues that pour through the letterbox to provide plenty of collage material.
  • Make a pact with the members of your family that the presents will be bought in the New Year/Boxing Day sales when all the excess stock in shops gets sold off cheap. Don’t go mad, though  again, set a maximum limit and stick to it. Use cash and leave the credit card at home if you’re likely to give into temptation.

Finance Specials

There could well be a few of you out there that don’t realise that Renault, that great French brand that has never quite made it here, are the owners of a very large slice of Nissan Motor Company.

So we see at the moment both Nissan and Renault marketing some very aggressive finance rates.

With Renault, you can get a 2.9% Interest Rate on the Megane, the new Latitude Sedan and the Fluence Sedan and a 3.9% Interest Rate on the commercial range, namely the Kangoo, Trafic and Master vans.

With Nissan, they are offering a 1.9% Interest Rate on the new Micra.

On top of these they are offering free servicing and a 5 year warranty on some models which all seems quite compelling.

However, as with all of these special offers there is small print, which you must read. Both are restricted to 36 month terms and it is interesting that the comparison rate referred to in the advertising relates to a 60 month contract for $30,000, when the Micra costs half of this amount! So, go figure!

As with all of these deals, whilst on the face of it they may seem attractive, it is always best to try and compare apples with apples. You may find that the rate is only available for the car if you pay the full ticket price for the car. Whereas you may be able to negotiate a discount and then finance the vehicle at normal rates and end up better off.

There is no doubt that for some people, these are well worth considering but we would recommend that you do your homework first and don’t get drawn in by some slick salesperson’s spiel.

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.

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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.

Toyota 2.9% Finance Offer

Toyota has released a new finance scheme to move some over stocked vehicles into the market, named- Toyota Advantage. The plan is to offer just 2.9% interest to approved buyers over a four year period using of course, Toyota Finance. It is only available on the Entry level Yaris YR, Prius, Corolla Ascent and Camry Hybrid models bought before January 31, 2011.

This is excellent news for those in need of a finance bargain. You can still negotiate a deal on the vehicle and receive the Finance package if you are approved. The reason is that Toyota is giving you the customer the bonus they would have normally given the dealer for selling the vehicle and is definitely an added incentive to tempt customers into their hybrid offerings for the first time.

David Buttner, Senior Executive Director of Sales and Marketing, Toyota Australia has recently be quoted saying, We are determined to continue offering customers excellent value with these cars, whether by adding features, repositioning prices or through other competitive offers such as finance.

You may choose from a straight 4 year term or add a balloon payment to it which would lower the monthly repayments even further.

This is a great deal with no loopholes but it is only available for the vehicles mentioned. All that said, it may not suit your individual needs and it may be more cost effective to get the car you actually want rather than those on offer. So if you are a private buyer or have and ABN and your own business ask Fincar to compare the deal with other vehicles you have in mind.

ATO Looking at FBT on Salary Packaging

Our office received a call from the Australian Financial Review for comment on the ATO looking into non compliance of FBT reporting.

Our office is seeing no decline in employees looking to take advantage of Salary Packaging a motor vehicle under a Fully Maintained Novated Lease agreement.

The reality is that the average PAYG Tax Payer is more informed today than they were, even 5 years ago. They understand that if they earn less than $180,000 per year, that, in many cases, they can make a genuine tax saving, if they set up their Novated Lease Agrement using the “Employee Contibution Method”. This method removes the need to pay FBT, by paying some of the costs from “Post Tax Income”. Not only do they save money, but it also romoves the onus on the employer to return FBT.

The ATO in our opinion is only looking at the reduction in FBT returns, as they believe that they are not receiving the correct revenue.

The most likely answer however is that there is a lack of education of employers. The employer, as he has not FBT liability, is not submitting an FBT return. The reality is, he should be.

As Roger Timms from Taxpayers Australia said, “it would be a quantum leap to conclude that a decline in returns was solely due to non-compliance”.

Phillip Gruppelaar