THE EFFECT OF THE FEDERAL ELECTION RESULT ON
SALARY PACKAGING FOR PBI's
Now that the result of the 2013 Federal election is known, the proposed abolition of the statutory formula car FBT election, by the prior Government, will now not occur, as the Coalition has clearly stated they will not abolish the statutory formula method, which does not require log books to be completed, nor does it require any car business use to apply.
PENDING FRINGE BENEFITS TAX AND OTHER TAX CHANGES
As the Medicare levy is rising to 2.0% from 1.5% from July 1st 2014, the ATO has announced the FBT rate is rising from 46.5% to 47.0% from April 1st 2014.
This FBT rate increase will result in a drop in the FBT exempt packagable amounts in the $30,000 grossed up FBT amount, due to the gross up factors being increased.
Whilst these higher gross up amounts have not yet been released by the ATO, by using the ATO calculation formulae, the formulae changes should be:-
Type one FBT, where the employer claims a GST credit, e.g. Novated car leases, 2.0647 increased to 2.0802.
Type two FBT, where the employer has no GST claim, e.g. a mortgage payment reimbursement, 1.8692 increased to1.8868.
The annual pre grossed up amounts reduce from $14,529.96 down to $14,421.69 for type one items.
The annual pre grossed up amounts reduce from $16,049.65 down to $15,899.94 for type two items.
Whilst the FBT exempt packagable amounts will reduce, so will the after tax salary sacrifice cost, due to the higher Medicare levy saving, due to the pre tax salary sacrifices.
METHODS TO INCREASE STAFF SALARY PACKAGE GAINS FROM 10% TO 33%
The employee of a $30,000 cap PBI FBT exempt employer, earns $64,600 salary, and has a stay at home zero income, spouse or partner, who looks after their 3 preschool aged children. The employee is repaying HELP debt, the family car is an owned 2006 model" thirsty " 4WD valued at $25,000, which costs $9,900 GST inclusive per year in operating costs to run, and they are paying off their mortgage.
The 4WD is too old to have a Novated sale and leaseback applied.
This scenario for simplicity's sake is ignoring specific FBT exempt items such as meal entertainment, holiday accommodation, car parking, airport lounge membership etc.
The "easy way out " salary package option is to salary sacrifice the $15,900 FBT exempt limit per year, of the type two FBT mortgage repayments, to use up the $30,000 PBI FBT exempt gross up cap.
The far better option is to add the existing 4WD, with an aggregate FBT value of $5,000 ($25,000 X 20%) under statutory formula car FBT, to the package, via a Salary Packaging Gurus associate lease, and then reduce the amount of the mortgage repayments in the salary package by the same $5,000.
The associate spouse / partner leases the car to the PBI employer, via an off balance sheet Salary Packaging Gurus operating lease, which can be terminated at any time, by either the employer, as the lessee, or the associate spouse / partner as lessor. The associate spouse / partner is not registered for GST, but has an ABN. As the associate is not GST registered, the FBT gross up is the lower type two, as is the mortgage repayment.
The associate spouse / partner has no reduction in receipts of family tax benefit part B, after the tax deduction for the car depreciation claim, and also in this case, there are no taxation liabilities from the associate lease rentals received by the associate.
The following table shows that the annual after tax gain with mortgage only is $3,837, but with the reduced packaged mortgage amount, plus the associate lease added to the existing family 4WD, creates a $12,074 after tax gain.
The table clearly shows that the effects of, or the lack of, reportable fringe benefits on matters such as child support payments and receipts, family tax benefit, rent assistance, HELP repayments, child care benefit etc. must be taken into account when a salary package structure is being designed.
NO CHILDREN? NO HELP DEBT ?
THE SALARY PACKAGE GAIN CAN STILL NEARLY BE DOUBLED
Assuming the employee does not repay HELP, and has no children, and thus has no family tax benefit receipts, the additional after tax gain with the revised package incorporating the associate car lease is $5,059 more, or still nearly double that of the $5,723 gain with just the mortgage salary sacrificed using the pending higher FBT gross up. In this case the salary package after tax gain with the lower mortgage component, plus the Salary Packaging Gurus associate lease, is $10,782 per year compared to the position without a salary package.
The employee and spouse / partner did not have to buy a replacement car, they just needed the current vehicle provided more tax efficiently.