In mid-July the Government announced that it was planning to change how FBT is calculated for cars that are packaged as part of a salary sacrifice scheme. The move is designed to add $1.8 billion to the coffers however many businesses are up in arms about the move and with good reason.
The inclusion of a car fringe benefit is one of the few salary-packaging methods that receive concessional tax treatment and the announcement without industry consultation has raised a furore about the impact the change to FBT for cars will have on the economy, not to mention the businesses that provide packaging and leasing services.
New leases entered into from Tuesday 16th July will be affected by the changes with the Treasurer, Chris Bowen, saying that the changes will directly impact 320,000 taxpayers. He sought to clarify the FBT announcement by saying that people will need to justify a claim of business usage either by filling in a log book or using a mobile phone app to track their percentage of business use over three months every five years.
One of the most immediate impacts has been for many businesses to delay purchasing vehicles for their employees until the details of the changes become clear, which is likely to hurt not only car manufacturers but also hit fleet management businesses. Employees are also likely to feel like their salary has just been raided without warning. Lower paid workers who need the FBT concession are likely to feel the hit while smaller businesses are will have to shoulder the administrative burden with yet another layer of paperwork.
The announcement means that most businesses - and, as it turns out, Governments - have postponed entering into any new agreements (e.g. novated leases) until there is greater clarity. The reason for the postponement is simple: if the FBT change goes ahead, it may fundamentally alter the tax outcome of the arrangement and impose a higher FBT liability on the employer (which would normally get passed onto the employee). As such, it's impossible to understand the true financial impact of any car packaging arrangements until the result of the election is known.
Under the current fringe benefit rules, you can choose to use the logbook method (also called the operating cost method) to physically record the business and private use of the car over a 12-week period. The alternative is to use the statutory formula which provides a flat 20% for personal use. So, if your business use of the car is high and personal use low, you would generally choose the log book method as this would often give you the lower FBT liability. Everyone else tends to use the statutory formula method. Fringe benefits tax applies to the personal use percentage.
Under the announced changes, the option to apply a flat 20% statutory rate would be abolished and everyone will need to use the logbook method from 1 April 2014. The only exception would be for existing contracts as at 16 July 2013 (the date the announcement was made). As long as these arrangements are not materially varied after 16 July 2013, the statutory formula method will continue to be available until the contract ends.
While it is unclear what 'materially varied' might mean (there is nothing more than a media release and basic fact sheet at this stage), if we look at other areas of recent FBT change, materially varied could mean renegotiating the residual value of a car, extending the term of the lease or making changes to the salary sacrifice arrangement between the employee and employer.
Outside of the car and car financing industry, the change - if enacted - is likely to apply to almost anyone who has a car salary sacrifice agreement in place, unless they are already using the log book method due to relatively high levels of business use. Basically any employer with a non-exempt vehicle (i.e. other than vans, utes, trucks etc) may be affected.
Businesses or employees looking to enter into new arrangements should stop and consider whether the arrangements can be postponed until at least after the Federal election. If this is not possible, it will be necessary to work through some worst-case scenario calculations and clarify in writing whether the employer or employee will bear the cost of any increased FBT liabilities.
In relation to existing arrangements it will be important to inform employees and other relevant people within the organisation of the risk of making any changes to those arrangements until there is more certainty in this area.
Many businesses use to use paper-based logbooks to track mileage, however smart phone apps may in fact make the shift to digital data management much easier.
Some employers choose not to use apps, due to the perception of "big brother" syndrome, i.e. that employees may feel threatened by having their every move scrutinised. But if the implementation provides a real cost saving, the motivation should be there, especially when the employee's car is packaged. We took at look at three apps worth considering: Logit FleetCare, Vehicle Log and Your Car Log.
While there has been a lot of concern around the impact of the change to FBT on vehicles, we strongly recommend seeking guidance on how the changes affect you or your business. Contact us on 02 9957 4033 or send us an enquiry via email.
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Last updated August 2013. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.