FBT changes – the impact on you and your organisation

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Prime Minister Kevin Rudd’s cutting of fringe benefits tax (FBT) on car concessions was announced yesterday, and it means some organisations will need to re-think their novating policies and initiatives.

The tax cut is an attempt to help fund the move to end the carbon tax earlier than planned, and will be achieved in part by cutting $1.8b worth of FBT car concessions.

The changes manifest as an annulment of the statutory method of valuing the taxable value of a car fringe benefit, which is calculated as 20% of the cost of the car. Instead, the operating cost method now must be used – calculated using the running costs based on the private use of the vehicle.

The operating cost method requires employees to keep a logbook recording each journey and its purpose, providing higher taxable value to cars that have high private use.

The announcement is big news for organisations looking to hold on to top-tier staff, as a recent survey from Smartsalary revealed that benefits remain the primary incentive to retention, with salary packing and novated leasing being a functional alternative to increasing wages, beneficial to both employees and employers.

“This announcement will increase the administrative burden on both employees and employers,” Rami Brass, director of tax services at RSM Bird Cameron, said. “The operating cost method not only requires employees to keep valid logbooks, but employers must maintain adequate documentation of all running costs of the car such as fuel, repairs and lease payments; there is also an imputed interest and depreciation amount that must be calculated using this method.”

Brass indicated that employers must ensure logbooks are maintained correctly and meet all ATO requirements. Organisations whose employees commute long distances will become disadvantaged, as commutes to and from work are deemed as private.

Simon Ellis, senior tax advisor from Smartsalary, shares these concerns, and stated that the changes will “significantly erode the value of salary packaged cars and may ultimately see them removed from the list of employee benefits that can be offered by employers.”

“Employers should be aware that any employee who 'signs up' for a salary packaged vehicle from 17 July 2013 onwards may not be able to access tax savings to offset the cost of that vehicle after 1 April 2014, and should therefore review their personal financial position carefully before entering into such arrangements,” Ellis said.

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