The announcement has meant that most businesses, and as it turns out Governments, have postponed entering into any new agreements (e.g. novated leases) until there is greater clarity. The reason for the postponement is simple, if the FBT change goes ahead, it may fundamentally alter the tax outcome of the arrangement and impose a higher FBT liability on the employer (which would normally get passed onto the employee). As such, it’s impossible to understand the true financial impact of any car packaging arrangements until the result of the election is known.
Under the current fringe benefit rules, you can choose to use the log book method (also called the operating cost method) to physically record the business and private use of the car over a 12 week period, or the statutory formula which provides a flat 20% for personal use. So, if your business use of the car is high and personal use low, you would generally choose the log book method as this would often give you the lower FBT liability. Everyone else tends to use the statutory formula method. Fringe benefits tax applies to the personal use percentage.
Under the announced changes, the option to apply a flat 20% statutory rate would be abolished. Everyone would need to use the log book method from 1 April 2014. The only exception would be for existing contracts as at 16 July 2013 (the date the announcement was made). As long as these arrangements are not materially varied after 16 July 2013, the statutory formula method will continue to be available until the contract ends. While it is unclear what ‘materially varied’ might mean (there is nothing more than a media release and basic fact sheet at this stage), if we look at other areas of recent FBT change, materially varied could mean renegotiating the residual value of a car, extending the term of the lease or making changes to the salary sacrifice arrangement between the employee and employer.
Who will be affected?
Outside of the car and car financing industry, the change if enacted is likely to apply to almost anyone who has a car salary sacrifice agreement in place, unless they are already using the log book method due to relatively high levels of business use.
What should you be doing now?
Businesses or employees looking to enter into new arrangements should stop and consider whether the arrangements can be postponed until at least after the Federal election. If this is not possible, it will be necessary to work through some worst case scenario calculations and clarify in writing whether the employer or employee will bear the cost of any increased FBT liabilities.
In relation to existing arrangements it will be important to inform employees and other relevant people within the organisation of the risk of making any changes to those arrangements until there is more certainty in this area.