One of the arguments presented by the salary packaging companies (please note these are companies that only exist due to the combination of a tax loophole and tricky marketing – https://taxrambling.wordpress.com/2013/11/29/the-post-the-salary-packagers-do-not-wanted-you-to-see/) is that removing the statutory method for calculating car fringe benefits would hurt the local car manufacturers. But by 2017 there will be no local car manufactures (Toyota will go to). So can we just kill this concession. In 1986 when the statutory method was introduced 87% of new cars were made in Australia. Now it is 15% and by 2017 it will be 0%. It is time to get rid of this $1 billion a year car support anomaly.
Go to any salary packager’s website and they will have a calculator. After you complete or the details the calculator will tell you how much you will save in tax by salary packaging a car. THIS NUMBER IS ABSOLUTELY RUBBISH. I don’t mean the calculation is wrong in any way at all. What I mean is that the calculator compares apples and oranges to get the tax saving.
What these calculators do is compare the after tax outcome of leasing the car in your own name with leasing the car under a salary packaging arrangement. The tax saving is right based on this comparison. BUT NOBOBY LEASES A CAR IN THEIR OWN NAME SO THE COMPARISON IS WORTHLESS. Outside of salary packaging, almost everyone who wants a car buys it with either cash they have saved or by using the equity in their home. The interest rate on cash you already have is 0%, but lets call it 3% as you could have invested it in a very secure investment. Your home loan interest rates is about 5-6% and does not look like moving much for some time.
The implicit interest rates in leases for cars are from 8-11%.
So if you were to do a real comparison it would be comparing salary packaging a leased car with using the equity in your home. There may be a tax saving between leasing you car in your own name and salary packaging it BUT that tax saving will be reduced by the extra funding costs of the interest rate in the lease when compared to the interest rate on your home loan.
Don’t compare leasing under salary packaging with leasing in own name. Compare leasing under salary packaging with borrowing from your bank using the equity on your home loan. And I dare you to ask the packaging companies to do this calculation for you… And watch them sweat…
In the National Tax Liaison Group FBT Subcommittee (yes I have sat on this committee and it is full of FBT nerds…) in November 2005 the Commissioner confrimed that, as an employer can provide a benefit to an employee for their long service valued at $1,000 after 15 years, increasing by $100 every year after that, and there is no FBT payable, an employee could ask their employer to package a long service award in their 15th year worth $1,000, then another $100 in the 16th year, then another $100 in the 17th year, and so on.
Just remember the benefit truly needs to be in recognition of long service and available to all employees so have a policy in place that allows this.
An expense fringe benefit arises when an expense is reimbursed, irrespective of when the employee incurred the expense that is reimbursed. So if you forgot to salary package an expense that it would have been beneficial to salary package then just get it reimbursed today and the benefit arises.
First a silly example… For ten years you purchase the Australian Financial Review online for $770 each year ($70 GST). Why not reduce your salary by $7,000 ($700×10 year), get the $7,700 reimbursed and have the employer recover the $70 of GST for each year ($700). You just have to track down the tax invoices and you will get $700 for it…
And now the real example… A taxpayer was asked to relocate to another city for work. They sold their house in the previous location and bought a new house in the new location. The real estate agent charged $9,000 and the stamp duty was $35,000. And it all happened a couple of year ago. This year the employee salary packages $44,000 and get these costs (exempt from FBT under section 58C of the FBTAA86) reimbursed. If you are on the highest marginal rate that is a tax saving of over $21,000. Nice!