FIVE ALERTS ON NON COMMERCIAL BASIS CAR SALARY SACRIFICING
The following scenarios have recently been referred to Bob Millikin, from Salary Packaging Gurus, by employers, and tax agents, for his thoughts of the eligibility of their structures to be accepted by the ATO as being transacted on an arm’s length and on a commercial basis.
A) $48,000 CAR - VASTLY EXCESSIVE 24 MONTH ASSOCIATE LEASE RENTALS - IMPLIED RESIDUAL VALUE WAY TOO LOW - INCORRECTLY STATED LARGE SAVINGS IN RECIPIENTS AFTER TAX PAYMENTS.
( i ) Lease implied residual 20% - Redbook future value of car was 57% in 24 months time.
( ii ) 24 months rentals on an SPG commercial basis $33,000, this advisor's quote $48,000.
(iii) The associate needs a fair rate of return, but not 36% p.a. with virtually no residual risk.
(iv) Recipient's payment needed $9,600, but employee only paid $4,200.
(v) Associate received $5,400 annual running costs on top of $48k lease rentals.
(vi) Associate "claims" $5,400 as a tax deduction, AND this is "treated" as employee paid.
(vii) The associate is the lessor, and is deemed to be a recipient.
(viii) There can never be a tax deduction claimed for an after tax recipients payment.
(ix) There is therefore a $5,400 shortfall in the employee after tax contribution.
(x) The type two FBT shortfall is therefore $9,387 over the 24 month lease term.
(xi) The associate lease itself is likely to be treated as non bona fide.
(a) Salary Packaging Gurus associate lease documentation was used.
(b) Salary Packaging Gurus revised lease rentals were used in the transaction.
(c) The employee made an after tax recipients payment of $9,600 per annum.
(d) The SPG overall after tax annual lease gain was still $5,200, but now on a commercial basis.
B) THE ASSOCIATE LEASE RENTALS ARE CALCULATED BY GROSSING UP THE CAR LESSOR ASSOCIATE' S CAR DEPRECIATION CLAIM - BUT BY AN UNRECONCILABLE FACTOR.
Situation one: - The 2002 $4k value car had been owned since new by the associate.
(i) The tax deductible D.V. depreciation left to offset the rental income was nearly zero.
(ii) The $3,600 annual rental quoted had no way of being reconciled as to how it was calculated.
(iii) The excessive rental charged was unchanged, regardless of the lease term.
(iv) This is impossible if grossing up D.V. depreciation.
(a) Rental reduced to a commercial $1,208 per annum, with SPG lease documentation used.
(b) Due to high older car operating costs the SPG after tax annual gain exceeded $5,000.
Situation two: - New car cost $89,000 and is thus a luxury car.
(i) The lessor associate is deemed to have sold the car to the employer.
(ii) As a result the lessor associate has no depreciation to gross up.
(iii) When Bob pointed this out, he was told there was an implied residual on the operating lease.
(iv) The advisor "didn't know" how much that was. The employer couldn't dissect the lease interest.
(a) Associate lease set up with an ATO guideline implied residual on the SPG operating lease.
(b) The employer could now calculate the non deductible lease component to be grossed up.
(c) The SPG associate lease was considerably cheaper than the Novated lease option.
C) CAR $9,300 REDBOOK RETAIL VALUE AS REQUIRED FOR EXISTING CAR FBT BASE VALUE - INCREASED BY ADVISOR BY 40% TO INFLATED INSURED VALUE - THIS INCREASED TAX DEDUCTIBLE EMPLOYEE RENTALS PAID - INCREDIBLY THE IMPLIED RESIDUAL UNDER THE OPERATING LEASE WAS ZERO.
(i) A commercial return for the associate on $9,300 over 60 months was $2,499 p.a.
(ii) This includes applying the applicable ATO implied residual value percentage.
(iii) The advisor quote was $4,274 p.a. over 60 months with no residual.
(iv) The associate received an "effective" 43.5% return, hardly a commercial return.
(v) In particular where the associate lessor had no residual risk whatsoever.
(vi) The associate lease itself, is likely to be treated as non bona fide.
( a ) The employer and accountant agreed the advisor proposal was not commercial.
( b ) The SPG associate lease documentation and calculations were substituted.
( c ) The employee still received a $4,000 + p.a. after tax gain, despite a lower tax deduction.
D) NOVATED LEASE - CAR TO BE LEASED NET OF $18,000 TRADE IN VALUE.
( i ) Bob Millikin has provided past input into the NTLG FBT Sub-Committee on this very issue.
( ii ) The lease was not bona fide, and future external property FBT issues could arise.
( iii ) The employer agreed the car leased value should ignore the trade in value.
( iv ) The motor dealer then increased the Novated lease lessor's tax invoice value.
E) NOVATED LEASE - 36 MONTHS - 15% RESIDUAL VALUE - 10k ANNUAL KILOMETRES
( i ) ATO residual minimum is 46.88% without justification of a lower percentage.
( ii ) No "fair and well considered" lower future value ( e.g. via Redbook ) was provided.
( iii ) The 15% RV lease is not bona fide, and future external property FBT issues could arise.
( iv ) As the Redbook future value in 3 years was 61%, the ATO 46.88% was used.
( v ) Again Bob Millikin has provided input to the NTLG FBT Sub-Committee on this issue.
There can be significant tax savings for employees effecting Novated and associate leases, but the transactions must be done on a commercial basis. Employers and employees alike, are both encouraged to contact Salary Packaging Gurus, to ensure that the lease structure under a commercial basis is adhered to.