What
is Fringe Benefits Tax (FBT)?
When an employer provides an
employee with a benefit as part of their employment, the benefit may be subject
to Fringe Benefits Tax (FBT). Fringe Benefits Tax is a Federal Government tax
payable on the value of certain fringe benefits. Salary packaging a vehicle is
concessionally treated for FBT purposes and therefore may be very
tax-effective.
When a vehicle is salary packaged
via a Novated Lease, FBT is usually calculated using the Statutory Formula
method. This method calculates the FBT payable each year by applying a
Statutory Percentage to the vehicle's FBT Base Value (the purchase price minus
government charges). This is multiplied by the number of days that the vehicle
is available to the employee, grossed-up by a factor (normally 2.0647) and then
multiplied by the FBT Rate (currently 46.5%)
The Statutory Percentage is
currently based on the kilometres travelled by the vehicle per annum. No
distinction is made between business and private use so, previously, a Novated
Lease using the Statutory Formula method was particularly attractive for
employees who had little or no business use and travelled high kilometres each
year
Changes
announced in the 2011/2012 Federal Budget
As a result of changes to the
Statutory Percentage announced in the 2011/2012 Federal Budget, kilometres
travelled is becoming less important. Between the Budget announcement made in
May 2011 and 1 April 2014 a standard statutory percentage is being phased in as
shown in Table 1 below:
Table
1: Statutory Percentages
Kilometres
travelled during the FBT year (1 April - 31 March)
Statutory
Percentage
Existing
contracts
New
Contracts entered into after
7.30pm
10 May 2011
1
April 2012
1
April 2013
1
April 2014
Less than 15,000km per annum
26%
20%
20%
20%
20%
15,000 km to 24,999km per annum
20%
20%
20%
20%
20%
25,000 km to 40,000 km per annum
11%
14%
17%
20%
20%
More than 40,000 km per annum
7%
10%
13%
17%
20%
Calculating
Fringe Benefits Tax (FBT) - an example
Using the Statutory Formula method,
the Fringe Benefits Tax (FBT) payable on a Novated Lease vehicle is determined
by the vehicle's FBT Base Value, the Statutory Percentage, the number of days
the vehicle is available for use by the employee, a gross-up factor and the
current FBT Rate. Firstly, the Taxable Value of the vehicle is calculated:
Table
2: Calculating Taxable Value
FBT Base Value
(price ex. reg. & stamp duty)
$50,000.00
Statutory Percentage
(assuming 20,000km per annum,
contract entered into June 2011)
20%
Days the vehicle is available
for use by employee
(assuming non-leap year)
365 days
Days in the full FBT year
(assuming non-leap year)
365 days
Taxable Value
= FBT Base Value x Statutory
Percent
x Days available / Days in FBT year
= $50,000.00 x 20% x 365 / 365
= $10,000.00
so using this Taxable Value, the
remainder of the Statutory Formula is applied as follows:
Table
3: Calculating FBT Payable
Taxable Value
$10,000.00
Gross-up Factor
2.0647
FBT Rate
46.5%
Fringe Benefits Tax
(per annum)
Taxable Value x Gross-up Factor x
FBT Rate
= $10,000.00 x 2.0647 x 46.5%
= $9,600.85
Once the estimated Fringe Benefits
Tax (FBT) liability is established, the cost is deducted from the employee's
salary package, along with the vehicle's operating costs. This ensures that as
long as the nominated kilometres are achieved, the FBT liability will be fully
funded from their salary package. It is important to note that the estimate of
the number of kilometres travelled each year should be as accurate as possible.
The impact of not achieving the required kilometres can be substantial as the
employee will be required to pay any increase in FBT that may occur.
The other important thing to note is
that the FBT year operates between the 1st of April and 31st of March of the
following year. As a result, in the first and last FBT year that you have use of
the vehicle, your kilometres are calculated on a pro-rata basis. As an example:
Table
3: Estimating Pro-rata Required Kilometres
Lease start date
1 October 2008
Days remaining in FBT year
(assuming non-leap year)
182 days
Days in the full FBT year
(assuming non-leap year)
365 days
Estimated kilometres
(per annum)
25,000
Required kilometres
(to travel by 31/03/2009)
KM per annum x Days remaining
/ Days in FBT year
= 25,000 x 182 / 365
= 12,466 km
What
is the Employee Contribution Method (ECM)?
The Employee Contribution Method
(ECM) enables an employee to reduce their FBT liability by making post-tax
contributions towards the operating costs of the vehicle. The recommended
method is to contribute an amount equivalent to the Taxable Value of the vehicle
thereby reducing the Taxable Value to zero. Providing the employee travels the
nominated kilometres per annum, this reduces the FBT liability to zero.
"Why would I make after tax payments towards my vehicle when salary
packaging is supposed to reduce my gross salary so that I pay less income
tax?"
This is a common question. The
simplest answer is that by making a payment after tax toward the running costs
of the vehicle, the employee can reduce the rate of FBT from 46.5% to their own
marginal income tax rate. This might be 30% or 41.5%. As a result, this can
reduce the overall cost of salary packaging their vehicle and enhance the total
tax benefits available to them.
The Employee Contribution Method
(ECM) can be applied to both a Fully Maintained Novated Lease and a
Non-Maintained Novated Lease. With the Fully Maintained Novated Lease, the
required amount of employee post-tax contribution is calculated as part of the
package and shown in the Salary Package Confirmed Estimate.
With a Non-Maintained Novated Lease,
the employee keeps receipts for operating costs that they have paid themselves,
and submits these (along with a Vehicle Declaration Form) to their employer at
the end of the FBT year - 31 March. The employer will then adjust the Taxable
Value of the vehicle by the amount of the receipts, removing some or all of the
FBT liability from your salary package.
