FBT reform expected to affect salary sacrifice arrangements

The downturn of high profile salary sacrificing companies such as McMillan Shakespeare has kept the Federal Government’s proposed changes to the FBT regime in the media over the last two weeks.  Indeed press coverage has largely been centred on the impact that the changes are expected to have on the automotive and salary sacrificing industries.

However, little attention has been paid to what the changes may signify for employers.

What are the proposed changes?

On 16 July 2013, the Government announced their intention to reform the current FBT regime in relation to the provision of motor vehicles to staff.

Where a motor vehicle is provided to an employee an FBT liability may arise.  Since FBT legislation was first introduced in 1986, employers have had the ability to choose between the statutory formula method and the operating cost method when calculating their FBT liability:

  • the operating cost method – this method looks at the operating cost of the motor vehicle and establishes a percentage for private use and a percentage for work use.  The percentages are based on a log book kept by the employee for a period of 12 weeks.
  • The statutory formula method – this method applies a designated percentage to the cost of purchase of the car.  The percentage that applies depends on when the arrangement commenced and also the number of kilometres travelled in a particular FBT year.

The proposed changes will remove the option of using the statutory method. The only calculation method available to employers will be the operating cost method.

The operating cost method can be far more burdensome from an administrative perspective.  Employers will need to ensure they are able to extract running costs information from their accounting records, on a car-by-car basis, in order to meet their FBT obligations.  Some of the expenses that employers will need to extract for each car provided to staff include fuel, registration, insurance, servicing, repairs and lease payments.

This may provide some difficulties to employers that, under the current rules, have chosen to apply the statutory formula method predominantly because of the less onerous record keeping requirements.

In order to manage their FBT liabilities, employers may wish to consider keeping valid logbooks for cars provided to staff, along with suggesting staff make after-tax contributions towards the private use of cars provided.

Valid logbooks record all usage (private and business related) of the vehicle for a 12 week period, following which a business use percentage can be calculated.  The business use percentage can be used to reduce the taxable value of the fringe benefit provided to staff.  Properly maintained logbooks remain valid for a period of five years, provided the private/business use of the car does not change significantly during that period.

Logbooks can be obtained from your local William Buck office.

When will they apply?

The government proposes that the changes will commence from 1 April 2014 and will apply to all new arrangements entered in to from 16 July 2013.

The proposed changes will not apply to existing arrangements.  Employers that provide cars to employees under existing arrangements will continue to have the option of applying either calculation method.  However, arrangements with staff will fall under the proposed changes if the existing arrangement is varied – such as when existing cars are replaced with new or different cars.

Should you have any further questions in regards to the proposed changes and how they will affect you, please contact your local William Buck office.