Update on proposed FBT changes to novated leases and company cars

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There has been much publicity about the Federal Government announcement on 16th July 2013 where it proposed to abolish the statutory method of calculating Fringe Benefits Tax (FBT) on salary sacrificed, company leased and company owned cars.

Subsequently, the Coalition announced on 19th July 2013 that they would oppose this suggested reform and would not support or make these changes if elected.

Should the Rudd Government retain office, legislation would still need to be passed by Parliament, but if this is achieved the reform would affect all new contracts entered into after 16th July 2013.

 

In Summary:

Labor Government Elected and legislation passed:

Existing novated leases (and company cars)

The proposed change does not have any effect on existing leases unless there is a material variation to it post 16th July 2013, so leases can run to the original completion date and the original benefits under the salary sacrifice arrangement will apply as before.

Novated leases (and company cars) entered into after 16 July 2013 will only be able to utilise the statutory method formula for calculating FBT until 1 April 2014. Following this date, drivers would be required to keep a log  book and use the operating cost method. This method is based on the actual business use of the car. FBT is only payable on the portion of operating costs attributable to private use.

Liberal Party Elected:

No change to FBT calculations and benefits under the novated lease arrangements will remain in place.

Industry Fallout

There has been much confusion and angst in regards to this announcement and the ramifications have been immediate and severe.

Car sales are down markedly through August, employees have been made redundant and much discussion has taken place across the industry in it’s entirety with the impact being felt Australia wide.

This topic has become a significant election issue and looms as one that could shape the election result.

Inconsistencies with data used to propose the FBT changes policy

The announcement on 16th July was accompanied with certain assumptions and reasoning, many of which have quite simply been inaccurate.

The Australian Salary Packaging Industry Association (ASPIA) has since been able to provide some facts and data which give a much more realistic position of the situation than originally portrayed to the public.

As part of the Henry Tax Review completed for the 2011 Federal Budget, changes to the statutory method for FBT reporting on vehicles were made after much consultation with industry bodies. As a result, a four year phase in period was outlined to accommodate the change. This is still in progress.

Estimates from industry sources suggest that it would be 2015 before the effectiveness of these 2011 changes could be accurately reviewed.

The table below compares the data that the Government have based their reform on or at least as presented in the press conference announcement, versus the actual data upon which it should have been based upon (ASPIA)

 

If the reform comes to pass, the operating cost method for FBT reporting, which requires drivers to complete log books verifying business use, will prove to be a very time consuming and ultimately costly exercise for all employees and employers. It has been widely criticised by the industry.

To highlight the bottom line position to employees having to use the operating cost method, the table below shows a standard arrangement for a novated lease under statutory method, against the proposed log book method at 0%, 30% and 70% business use.

For the purposes of the above exercise, we have used the following parameters;

• 20,000 kms p/a             • $33,000 car (inc GST)             • 36 months