Posts Categorized: Employment matters

Salary packaging a car

It never ceases to amaze how many new business clients have their cars owned the wrong way.  Not that they should know – but their former accountant should have, but for some unknown reason, never bothered to advise their client!

So what is the best way to salary package a car?  There is no single answer that applies to all.  It is simply a matter of analysing a client’s situation to work out what is best for them.

If one is provided with a passenger car by one’s own business run through a company or trust, then Fringe Benefits Tax (FBT) tax rules apply.  There are two stages in determining the outcome – and two chances to maximise the outcome.

The first step is to choose which of the two methods to use to determine the value of the car fringe benefit.  The benefit can be valued under either the log book method or the statutory formula method.  I view the log book method as it is what it is.  The only advantage of having a car provided by one’s own business rather than in one’s name is that is that GST can be claimed back.  For many though, the statutory formula can be most generous.  All that matters is how many kilometres are travelled annually; the actual split between business and private doesn’t matter as an implied business use is assumed.  For those with a low percentage of work travel, they can effectively claim a much higher work percentage – and it is audit proof (provided the right declarations are completed).

The second step is to determine the best way to extinguish the fringe benefit value.  Paying FBT tax is rarely the best option as it equates to the highest marginal tax rate.

That said, we recently advised a client on how to salary package their next car.  They were looking at an expensive car and were in the top marginal tax rate.  By structuring the package in the most optimal way, we estimate the client will be $1,800 to $2,800 better off in each of the next 4 years.  So after 4 years, they will have had an average of $9,200 more in their pocket.  Quite a good result indeed.

We would welcome your call to see how we can make you better off.

The most misunderstood tax (and some opportunities)

In my experience, Fringe Benefits Tax (FBT) is the most misunderstood tax.

I say this as the ATO makes corrections in every second FBT audit.  Employers just don’t calculate the correct benefit amount and tax thereon.  It is also amazing how many clients who are employees of large employers are sacrificing salary for fringe benefits and then simply paying the FBT tax thereon without exploring alternate ways to reduce the taxable value.  How does this happen?  It happens as the employer calculates the taxable value of the fringe benefit but does not go on to see how the employee can reduce or extinguish the taxable value of the fringe benefit by making after what are called employee contributions (which they do so at their marginal tax rate).

What is FBT you may ask?  It is a tax on an employer for fringe benefits provide to an employee.  It’s basically anything other than salary or superannuation.

Some employees are lucky – their employer does not have to pay FBT so there is no corresponding adjustment to the employee’s remuneration package.  Exempt employer include public hospitals and charities.

There are also employers that pay a reduced rate of FBT; private schools being the most common example.  Otherwise, the FBT tax rate payable is a flat 49% where one is employed by a “normal” employer.  As I noted earlier, where many employees lose out is that nothing is done to reduce the amount that the FBT tax rate is applied to.

For those employed by FBT exempt employers, you will almost certainly want to salary package as many fringe benefits as possible.

So what are the benefits that those employed by their own business or “normal” employer can package:-

  • Cars.
  • Exempt fringe benefits such as lap-tops.
  • Those benefits subject to the minor, infrequent and irregular exemption.

So can you make yourself better off by sacrificing salary for fringe benefits?  We have a calculator which can show how you may benefit.  Ring us to schedule a meeting so we can show you how we can increase your after tax income.

 

At MRS, we will spend today planning for your success tomorrow.