Archive for January, 2012

Novated Leases: 8 months on from the 2011/12 Federal Budget Changes

Hi Readers – Simon Ellis here guest posting about the 2011/2012 novated lease budget changes.

It’s been just over eight months since the 2011/12 budget changes were implemented and now that the dust has settled we thought it would be a good time to review the new landscape for salary packaged cars.

Following the budget changes there are now 2 types of packaged vehicles in Australia:

  1. Vehicles leased before the 2011/12 Budget; and
  2. Vehicles leased after the 2011/12 Budget.

All vehicles can still use the Statutory Formula FBT valuation method – where the tax payable on the car is calculated as a % of its purchase cost – however the Statutory Formula percentages are now different depending on whether the pre-Budget or post-Budget rules apply.

Each of the above vehicle types is examined in more detail below.

Vehicles leased before the 2011/12 Budget

Novated leases that commenced on or before 10 May 2011 are, in most cases, valued for FBT purposes using the ‘old’ Statutory Formula rates:

Kilometres Travelled

All Years

0 – 14,999km

26%

15,000 – 24,999km

20%

25,000 – 39,999km

11%

40,000km +

7%

Unsurprisingly, packaging activities for employees with a pre-Budget lease remain largely unchanged. In particular, annual km targets are still relevant: low km drivers are penalised by a high (i.e. 26%) valuation rate, while high km drivers are still able to access very attractive low rates.

It is equally important to note that an exception applies to pre-budget cars for which a “commitment event” has occurred post-budget. “Commitment events” result in a vehicle moving from the old Statutory Formula rates to the new rates (discussed in the next section below) as per the following table:

Commitment event

Application of ‘new’ rates

Lease is refinanced Post-budget rates will apply from 1 April following refinance date.
Employee changes employment Post-budget rates will apply from employment change date.

Most drivers holding a pre-Budget car are happy with the old FBT rates, but it is worth noting to those who see an advantage in the new rates that deliberately bringing about a Commitment Event could be seen as tax avoidance by the ATO.

Vehicles leased after the 2011/12 Budget

Novated leases that commenced after 10 May 2011 (or have had a post-Budget commitment event) are valued for FBT purposes using the ‘new’ Statutory Formula rates:

Kilometres Travelled

FBT Year Ending

31/3/2012

31/3/2013

31/3/2014

31/3/2015

0 – 24,999km

20%

20%

20%

20%

25,000 – 39,999km

14%

17%

20%

20%

40,000km +

10%

13%

17%

20%

While the new rates have seen high-km drivers lose a portion of their tax benefit, they’ve also delivered a big win to ordinary drivers who can now lock in great tax savings regardless of kilometres travelled. Packaging employees are no longer penalised if annual kms fall below 15,000!

As predicted, this change has seen a big jump in vehicle packaging amongst ordinary Australian drivers: our leasing team has seen a 150% increase in the number of drivers with low annual kms taking up a novated lease!

To better understand this change we modeled the tax savings across different kilometre bands at two salary levels: $45,000 and $95,000. Our modeling showed the following annual saving results for the 2012 year:

Annual Tax Savings at $45,000 Salary

Annual Kilometres Travelled

Pre-Budget

Post-Budget

% Change

14,500 km

$2,740

$3,356

22%

21,000 km

$3,583

$3,583

0%

30,000 km

$4,548

$4,331

-5%

Annual Tax Savings at $95,000 Salary

Annual Kilometres Travelled

Pre-Budget

Post-Budget

% Change

14,500 km

$3,248

$4,050

25%

21,000 km

$4,470

$4,470

0%

30,000 km

$6,254

$5,853

-6%

To summarise, under the new rules we have seen:

  • a 20-30% increase in the savings available to low-km drivers;
  • no change in the savings available to mid-km drivers; and
  • a 5-10% decrease in the tax savings currently* available to high-km drivers.

*Note that our modeling is for current-year packaging only. Savings for high km drivers will decrease further over the next three years to be more in line with those available to mid-low km drivers.

So, overall there have been a lot more winners than losers from the Budget changes, with low-km drivers seeing a big increase in their tax savings while high-km drivers are seeing only a modest reduction in theirs.

And the most important result: thousands of dollars in tax savings remain available to everyone!

Remember – if you want to see what sort of savings you could achieve through a novated lease then visit our Smartleasing website and have a play around with the Novated lease Calculator.

Leave a comment here.

Potential changes to the LAFHA benefit

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July 2012 update: For the latest information on LAFHA changes, please click here.

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Hello all – it’s Simon here, Senior Tax Advisor at Smartsalary…

The Federal Government has released its proposed changes to Living Away from Home Allowance benefits.

Should these be endorsed, the two points that will most notably impact salary packaging can be summarised as follows:

1. Eligibility: eligibility for the living-away-from-home (LAFH) status is going to be severely limited for temporary resident employees (i.e., those on 457 visas) – in fact, most will no longer be able to claim LAFH status.

2Substantiation: All LAFH benefits will now need to be substantiated, although food reimbursements won’t be, as long as they are paid at “reasonable” levels.

These changes will not apply until 1 July 2012; however we expect that the number of customers who will qualify to salary package LAFH benefits will drop significantly.

So if you’re a visiting foreign worker, or a business employing visiting foreign workers, you might want to start thinking about some of the other salary packaging opportunities available to employees who move from one location to another.

For example, relocation exemptions can offer significant opportunities for savings around direct relocation costs PLUS some temporary accommodation benefits for eligible employees.  Equally, if you’re relocated to a remote area there are very generous concessions available for household rent and utilities.

Smartsalary currently offers these benefits to any business that elects to add them to the menu of benefits, so if you’re interested and these benefits are not already available then you should ask your employer to add them today!

Leave a comment here.


Deven Billimoria
Chief Executive Officer
Smartgroup

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