Packaged Cars Remain Effective

Transcription

1 Packaged Cars Remain Effective By Gary Fitton Remuneration Strategies Group On Tuesday, 16 July 2013, the Government issued an Announcement that it would be removing the FBT statutory formula method for salary-sacrificed and employer provided car fringe benefits. Instead, employees would need to use the log book method to ensure that their car fringe benefits taxable values excluded any business use. It should be noted that the Coalition Opposition Leader Tony Abbot MHR has pledged to restore the flat statutory cost rate of 20%. FBT History We have come a long way from the pre-fbt, section 26(e) days, when the employer provided car was effectively a tax free fringe benefit. Then from 1 July 1986 the FBT system was adopted from the 1985 New Zealand FBT system, to which Australia imposed the tiered car fringe benefit statutory taxable value rates of: - 26% for annual kilometres less than 15,000; - 20% for annual kilometres of 15,000 to less than 25,000; - 11% for annual kilometres of 25,000 to 40,000; and - 7% for annual kilometres of more than 40,000. We then adopted the flat statutory cost rate of 20% from 1 April 2011, which was lower than the New Zealand statutory cost rate of 24%. Operating Cost Method with Log Book Under the Operating Cost Method, the taxable value of the car fringe benefit is calculated as the percentage of total operating costs attributable to the private use of the vehicle, less any employee contribution. RemNews August 2013 Packaged Cars Remain Effective. 1

2 The operating costs are the actual costs of running the car, including fuel, repairs, servicing, registration, insurance, interest and depreciation or lease costs. Under this method, the employee or an associate must maintain a log book record of the business usage, outlining distance travelled and the business rationale for each trip. This log book must be maintained for a continuous period of three (3) months and applied over a five (5) year period provided there is no material change to the business use during that period. Government Announcement 16/07/2013 The general impact of this Government Announcement is to increase the 20% statutory cost taxable value up to an operating cost taxable value of around 50% of the purchase cost of the car. As the Government itself stated in its own Announcement Fact Sheet: - Around two-thirds of employees that salary sacrifice a car, earn over $100,000 per annum; and - Around 10% of employees earning less than $100,000 per annum, salary sacrifice a car. The Australian Salary Packaging Industry Association Response However, the Australian Salary Packaging Industry Association (ASPIA), in its Press Release of 16 July 2013, stated that it was a misconception that packaged cars only benefit high flying executives. They claimed that, the average value of salary packaged cars in Australia is less than $35,000 and most users of the benefit earn closer to $70,000 per year. The Effect Of This Announcement The effect of this Government Announcement is, of course, an increase in total car fringe benefits tax worth around $1.8 billion to the Government. This effect is best demonstrated by way of an example. Over the years, RSG extensive experience in packaging cars has demonstrated that, for most cars, the total annual car costs (i.e. lease costs and running costs) will be around 50% of the original purchase price. RemNews August 2013 Packaged Cars Remain Effective. 2

3 For example, a relatively modest car costing around $30,000 to purchase, and travelling around 15,000 kilometres per annum, will incur total car costs of, around, $15,000 per annum. (We have an actual example of a car costing $30,000 and travelling around 40,000 kilometres per annum incurring total annual car costs of $17,435 (i.e. annual lease costs of $9,708 and running costs of $7,727)). Under the proposed FBT regime the $15,000 total annual car costs will incur FBT (46.5%) of $13,037 per year, of course assuming no business use. Under the current FBT regime, the 20% statutory cost taxable value would result in FBT of $5,215. (This is an increase in the annual FBT liability of 150%). Inherent within the FBT regime introduced from 1 July 1986, the employer and the employee have the capacity to treat fringe benefits as taxable under the PAYG income tax system, subject to the employee s own personal income tax rate. This is achieved under a process known generally as the Contribution Method. The Contribution Method Under the Contribution Method, the employee makes an after tax contribution to the FBT taxable value, to reduce that FBT taxable value FBT taxable value, to zero and treat that taxable value as a contribution from ordinary taxable salary. If the employee were to be earning salary of between $80,000 to $180,000 per annum, the employee s marginal income tax rate would be 38.5% (including Medicare Levy). If the Contribution Method were to be adopted in which the employee contributes to the car total car costs from PAYG salary, under the proposed car FBT regime, the employee will be paying income tax of $9,390 per annum on the total car costs of $15,000. Under the current FBT regime, with the 20% statutory cost taxable value and utilising the Contribution Method would result in income tax payable of $3,756 with no FBT (This is an increase in the annual income tax liability of 150%). Therefore, under the Government s proposed FBT changes, while the packaged car will be incurring an increased tax impost, it remains relatively more effective for the employee and the employer to continue to package the family car, provided they utilise the PAYG salary based, Contribution Method. RemNews August 2013 Packaged Cars Remain Effective. 3

4 In our example, under the Government s proposed FBT changes, the car purchased for $30,000 with running costs of $15,000, provided under a salary packaging arrangement (and possibly involving the unique Australian novated car lease arrangement) and utilising the Contribution Method, would save the employee $3,647 per year ($13,037 less $9,390). The impacts of these proposed FBT changes are set out in Table 1 below. Table 1: Proposed Car FBT Changes Government Announcement 16/07/2013 Applies to current contracts from 1/07/2014 Employees Total Car Running costs of 50% of purchase price Purchase price $30,000 What Is To Be Done After the initial shock/horror reaction to the proposed removal of the statutory cost method for valuing car fringe benefits (i.e. which sets a taxable value of 20% of the car purchase cost) and the replacement by the operating cost method (i.e. lease costs plus car running costs which, as we mentioned earlier, usually fall around 50% of the car purchase cost) employers and their employees may need to renovate their motor vehicle arrangements. It should be noted by all concerned that the proposed FBT changes do not detract from the effectiveness of the Novated and Associate Lease Arrangement. Novated Lease Under the Novated lease arrangement the employee takes out an ordinary finance lease with a finance company to acquire the use of a motor car. The employee, the employer and the finance company then enter into a novation of that finance lease contract (ie a tripartite agreement), under which they effectively transfer the operating lease components of the finance lease to the employer, while the employee remains in the employment of the employer. RemNews August 2013 Packaged Cars Remain Effective. 4

5 FBT Taxable Value FBT Rate 46.5% Contribution Method (CM) Rate 38.5% CM Savings 16/07/ % $5,215 $3,756 $1,459 1/07/ % $13,037 $9,390 $3,647 Tax Increase $7,822 $5,634 % Tax Increase 150% 150% Associate Lease Under this arrangement, the lease may be renovated to an Associate (e.g. a spouse) who is on a lower marginal tax rate than the employee. This means that the Associate Lease Arrangement maintains its effectiveness post 1 July It Is Not Just About Tax Of course, there is more to a packaged (novated or associate) lease car arrangements than simply taxation considerations. The convenience and effectiveness of the packaged car for both the employee and the employer (plus fleet discounts, GST credits etc.) to balance their private business commitments far outweigh the impact of the proposed FBT changes. The neutralisation of the taxation treatment, merely reinforces the legitimate non-tax, pragmatic business and non-business reasons for employers providing packaged motor vehicles to their employees as a key part of their total remuneration packages. After salary and superannuation, the packaged car is the most common fringe benefit provided to Australian employees as a part of their total remuneration packages. What also needs to be kept in mind is that, provided there is no material change to the existing packaged motor vehicle contractual arrangements, the compulsory and comprehensive application of the operating cost methodology will not apply until 1 April Therefore, we have nine months to consider our respective taxation positions regarding our novated lease and packaged car fringe benefits. If our car is our baby, maybe we should not be throwing it away with the (car) bathwater. RemNews August 2013 Packaged Cars Remain Effective. 5

6 Postscript The Novated Car Lease and the Associate Car Lease arrangements were created by Gary Fitton and received their first ATO private binding tax rulings in Those private rulings were then incorporated in a public tax ruling, IT2509, which was released in November They remain the pre-eminent methodologies for providing car fringe benefits in Australia. While the former Taxation Commissioner Mr Trevor Boucher initially called that Novated Car Lease the first fringe benefits tax avoidance scheme, ironically the ATO, we understand, will now only provide its employees with perquisite vehicles under the Novated Car Lease arrangement. Gary Fitton can be contacted on (03) or by at gfitton@remstrategy.com RemNews August 2013 Packaged Cars Remain Effective. 6