The 2011 Federal budget signaled significant changes to the way Fringe Benefits Tax will be calculated on the use of motor vehicles. Traditionally, motor vehicles have formed an essential part of many remuneration packages and it was initially feared that the changes to the legislation would make it prohibitive for employers to use this carrot to entice and retain employees. However, closer analysis suggests that there continues to be scope to tax effectively package motor vehicles into employee’s salary under the new regime.
What is a Salary Sacrifice arrangement?
Salary packaging (or a salary sacrifice arrangement) is an arrangement between an employer and an employee where the employee forgoes future wages in return for the employer providing a benefit of equal cost.
The aim of an effective salary sacrifice arrangement is that:
- The employee pays income tax on the reduced salary, thereby reducing their personal tax liability and;
- The employer may be liable to pay FBT on benefits provided, however the total cost of employment (including salary, the cost of the benefit provided, superannuation and FBT) to the employer ideally remains unchanged.
Recent Changes to Valuation of Motor Vehicle Fringe Benefits
The changes to the Motor Vehicle FBT rules will only affect those employees who have used the Statutory Formula Method to value the car benefit they have salary packaged.
The statutory formula method uses a “statutory fraction” to determine the taxable value of the fringe benefit provided; a lower statutory fraction results in a smaller taxable value (and lower fringe benefits tax liability).
Where an employee travels more than 25,000 kms annually, under the old provisions they would be able to apply a statutory fraction of either 11% or 7% depending on the annual kilometres travelled; the new laws will apply a flat statutory fraction of 20% regardless of the annual kilometres travelled. This can reduce the tax effectiveness of salary packaging where employees travelled more than 25,000 kms a year.
The following table outlines the difference in the taxable value of the car using the statutory fraction under the old rules and the new rules:
|Old Rules||New Rules|
|Gross Taxable Value||$2,100||$6,000|
|FBT Gross Up Rate||2.0647||2.0647|
|Grossed Up Taxable Value||$4,336||$12,388|
Is there still any benefit in Packaging Motor Vehicles?
While the Operating Cost Method of valuing motor vehicle Fringe benefits is still an option, statistics suggest that up to 70% of employers rely on the Statutory Method due to the higher record keeping requirements involved with the Operating Cost Method.
The initial response to the changes to the Statutory Method was to assume that salary sacrificing motor vehicles under this method was no longer tax effective.
Our analysis suggests that it is still viable to effectively salary package a motor vehicle using the statutory method, provided appropriate consideration is given to the base value of the vehicle and the employee’s gross salary.
The following table highlights the potential savings to net disposable income available under the new rules:
|Base Value of Car||Statutory Percentage||Notional Taxable Value of Benefits||Saving to Net Disposable Income|
|$ 40,000||$ 30,000||20%||$ 6,000||$ 1,757|
|$ 80,000||$ 30,000||20%||$ 6,000||$ 2,075|
|$ 120,000||$ 30,000||20%||$ 6,000||$ 2,433|
|$ 200,000||$ 30,000||20%||$ 6,000||$ 2,844|
Actual savings would differ depending on the base value of the car and in accordance with the staggered implementation of the new, flat 20% statutory percentage.
Advantages of Salary Packaging
Offering Salary Packaging services to your employees is one way to position yourself as an employer of choice and enhance employee recruitment and retention.
Salary packaging effectively increases take home pay and reduces taxable income, resulting in overall tax savings.
Speak to our Specialists
If salary packing has been an instrument used to assist your business to retain key employees or if you would like to consider how you or your business could benefit by salary packaging, please contact our office where one of our FBT Specialists can discuss the options available to you.