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Fringe Benefits Tax

Advantages of FBT Statutory Formula Method

Now that the recently elected government has decided to jettison the abandonment of the statutory formula method of calculation of fringe benefits tax for company and salary packaged motor vehicles (as proposed by the previous government), it is worth contemplating the advantages of this method over the operating cost method.

The statutory formula method is:

Private use friendly

The statutory formula method does not distinguish between business and private use, hence this method does not penalise those with high private use of the company or salary packaged vehicle!

Under the operating cost method the calculation of fringe benefits tax is based solely on the level of private use – the more private use the greater the FBT liability!

Record keeping

The statutory formula method includes all kilometres, whether business or private, hence there is no requirement to keep records to distinguish between business and private – all that is required is the opening and closing kilometre readings for the FBT year and the base cost of the motor vehicle.

The operating cost method would not only require log book kilometres, but records of the usual motor vehicle expenses:

  • Fuel
  • Insurance
  • Registration
  • Services
  • Repairs
  • Lease payments

Further, for owned motor vehicles the calculation of depreciation and imputed interest would need to be calculated as part of ‘operating costs’.

Tax concessions

The statutory formula method allows the base value of the motor vehicle to be discounted by one third after four full FBT years!

Further, although the statutory rates are changing to a standard 20%, usually the more overall kilometres travelled the lower the statutory rate.

General

The use of the statutory formula method is certainly less onerous in terms of record keeping, therefore convenient for taxpayers and accountants.  Notwithstanding the advantages outlined above, clients would be well advised to make the comparison between statutory formula and operating cost methods, particularly with higher cost, low private use motor vehicles.  Although the operating cost method is likely to yield a better fringe benefits tax outcome, only 30% of taxpayers use it; even with relatively high business use (which would be exempt from FBT) taxpayers tend to prefer the convenience of the statutory formula method.

Late Lodgements of IAS & BAS

Those preparing and lodging instalment and business activity statements (IAS/BAS) should be aware the late lodgement penalties increased in the past financial year from $110 a penalty unit to $170 a penalty unit.

It is important to understand that a penalty unit is a 28 day period or part thereof!  That is, if you fail to lodge your IAS/BAS by the due date but, for example, lodge a few days late, then this represents one penalty unit and the penalty amount which will be levied is calculated as follows:

Class:

SMALL PAYG WITHHOLDER

MEDIUM PAYG WITHHOLDER

LARGE PAYG WITHHOLDER

< $25,001
or
income/turnover
< $1million

$25,001 to $1million
or
income/turnover
>$1million <$20million

$1million+
or
income/turnover
>$20million

Rate/unit:

$170

$340

$850

Obviously, if lodgement is later than 28 days, then the penalty is increased depending on how late lodgement is, up to a maximum of 5 units. That is, the maximum penalty may be:

$850

$1,700

$4,250

The definition of a small PAYGW remitter is one with PAYGW deductions of less than $25,001 – this threshold represents 3 employees (any employer proprietors are included in the 3), earning about $52,000 gross each!

You will see how easy it is for small class to become medium class.  The assessable income or annual turnover threshold of $1million will also see apparently small businesses classified as medium with the significant increase in penalties!

Fortunately, registered tax agents lodging on behalf of clients are, in some cases but not all, afforded concessional extended lodgement deadlines.

Splitting Superannuation

Traditionally, at the end of the day there is a significant imbalance in the amounts within husband and wife superannuation accounts due, of course, to the stereotypical roles of breadwinner and homemaker for much of their respective working lives.

The introduction of spouse superannuation contribution splitting some years ago was advantageous for two reasons:

  • effectively it meant a couple could have twice as much in low taxation superannuation; and
  • double the amount which could be withdrawn tax free!

With the capping of contributions to superannuation, the amount which can be held in superannuation is unlimited and in our opinion the next couple of decades will see balances swell to $millions as the younger generations realise 15% taxation is a most attractive tax rate for investments, with proceeds tax free on attaining 60 years of age.

While concessional (deducted) contributions are capped at $25,000 or $35,000, depending on age, we would expect the capping to be relaxed over the next year or so.  Further, $150,000 per annum may be tipped into superannuation on a non concessional (undeducted) basis.

Returning to superannuation splitting, the after tax concessional contribution (i.e. 85%) may be transferred each year to your spouse to maximise the available balance.  Between 55 and 60 years of age, both would then be able to withdraw the first $180,000 each of the taxable component on a tax free basis!

Of course, the more funds that can be placed in superannuation, the better the ultimate outcome.

Redundancies

As the economy remains soft and redundancies/retrenchments seem to be the order of the day, particularly in the mining and its service industries, it is topical to reflect on aspects of redundancy from the perspective of the employer.

Employer

A redundancy occurs when the employer determines a position is superfluous and does not need to be filled; this may arise, for example, because of:

  • new technology
  • declining sales
  • restructure, merger or takeover

As an employer you may be subject to the Fair Work Act, which covers employees including:

  • all people employed by companies (Pty Ltd or Ltd)
  • all people employed in VIC, NT and the ACT
  • all people employed by the Commonwealth or a Commonwealth authority
  • waterside employees, maritime employees or flight crew officers employed in connection with interstate or overseas trade or commerce
  • all people employed by sole traders, partnerships, other unincorporated entities and non-trading corporations in NSW, QLD, SA and TAS.

Should the Fair Work Act apply to you as an employer you will not, however, be required to make redundancy payments in the following circumstances:

  • the employee has less than 12 months of continuous service
  • the employee is employed in a small business of less than 15 employees
  • the employee was terminated because of serious misconduct
  • the employee is casual
  • the employee is an apprentice
  • an industry-specific redundancy regime already applies

The Fair Work Act prescribes payments to be made in the case of redundancies, but genuine redundancy payments to employees are concessionally taxed (tax-free) in the hands of the employee, to the following extent:

Financial Year

Flat Amount

Amount for each year of completed service

2013/2014

$9,246

$4,624

2012/2013

$8,806

$4,404

The redundancy payee must be under 65 years of age at the time of the arm’s length payment and there should be no re-employment of the redundant employee; nor should a “redundancy” payment be in relation to the termination of a fixed period engagement.

Read more…

Proposed Tax Changes Ditched

Prior to the recent election, the then government announced tax changes which would have been introduced had it been returned.  The government has not wasted much time in rejecting the proposed changes:

  • Fringe Benefits Tax – the plan to abandon the statutory formula method of calculating taxable value of benefits will not be proceeded with!
  • Superannuation fund income >$100,000 – the proposed increase in income tax to 30% in respect of income over $100,000 has been axed.
  • Work related education expenses – a cap of $2,000 was to be introduced but fortunately good sense prevailed and this also was rejected.