How to eliminate FBT on a CompanyFleet?

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Cash out company cars and phase in novated leasing.

Intelligent Car Ownership.

Intelligent Car Ownership.

Introduction

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"Not all vehicles are subject to FBT, so it helps to define your fleet before you begin."

Define your ‘fleet’First of all you need to categorise the vehicles in your fleet as outlined below.

Genuine Tool of Trade (TOT) vehicles – FBT exemptThere are two variations of vehicle in this category:

A. A vehicle that does not fit the definition of a car as per S.995-1 of the ITAA 1997; typically vehicles that areover one tonne and have only minor, infrequent and irregular non-work related use. For example, certain dual cab utes, vans and trucks.

B. ‘Pool’ vehicles that are used by at least two employees in any one FBT year, that have only minor, infrequentand irregular non-work related use. For example, a small passenger hatchback that acts as a shared resource for visiting clients.

ACTION: Both of these categories are FBT exempt, no action is required.

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Since 2011, FBT on company cars utilising the statutory method has almost doubled for

vehicles travelling more than 25,000kms p.a (11% - 20%) and almost tripled for vehicles

travelling more than 40,000kms p.a. (7% - 20%).

If you’d like to eliminate FBT on your fleet, all you have to do is cash out company cars

and phase in novated leasing.

How to eliminate FBT on a Company Fleet

How to eliminate FBT on a Company Fleet

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Genuine Tool of Trade (TOT) vehicles – non-FBT exemptA vehicle that has been customised to carry out a specific work task, but the employee also has personaluse for the car. For example, a passenger station wagon optioned with a work specific cargo barrier.

ACTION: These vehicles are critical to business operations and cannot easily be ‘cashed out’.

Non-Genuine TOT ‘company cars’A pure passenger vehicle that an employee needs to do their job, but has not been customised in any wayto carry out a specific work task. For example, a non-branded passenger sedan.

ACTION: These vehicles can be ‘cashed out’ and replaced, refer to step 2 to determine relevant compensation levels.

‘Perk’ vehiclesA car that has been given to an employee for purely ‘perk’ purposes. In other words,they have absolutely no business use for the car at all.

ACTION: These vehicles can also be ‘cashed out’ and replaced, refer to step 2 to determine relevant compensation levels.

Determine the costs and compensation levelsNow you know which vehicles have to go, you need to address their replacement.

A. Figure out how much it costs to run the vehicles

You need to include capital costs (and associated opportunity costs) or the finance payments, fuel, fleet insurance policy, insurance claims, replacement vehicle costs, servicing and maintenance, fleet management expenses, your internal salary costs to manage the fleet, and of course, FBT.

That’s cost A, your fleet costs.

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B. Determine how much compensation you would have to provide an employee,to enable them to take out a novated lease on exactly the same type of car.

You may have to make some tough calls here.For example, you might have two employees on the same salary with the same company car,but one of them lives 2kms from work and the other, 50kms from work.

Do you take the additional kms into consideration? Once you’ve decided on this, you’ve established cost B, your alternative compensation costs.

How to eliminate FBT on a Company Fleet

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C. Now it’s decision time. Where in the compensation scale above will you land?

If your compensation costs are less than your fleet costs then cashing out company cars will save you money.It’s an easy choice, and an easy sell to the affected employee base.

If the compensation costs are more than your fleet costs then you’ll need to decide if it’s worth it.If not, then perhaps a like-for-like replacement isn’t the way to go, and you’ll have to slide down the compensation scale a little.

D. Levels determined, you now have to decide on the compensation model.

For non-genuine TOT vehicles, you now have two options - car allowance or a salary increase.From a company tax perspective there’s no difference at all, both are accompanied by an increase insuperannuation. There are other factors to consider however.

Car allowance

PRO If an employee moves roles and doesn’t require a car anymore, you can simply remove their car allowance.

CON You now have two items to benchmark every year, salary & car allowance.

Salary increase

PRO You only have one item to benchmark and address every year.

CON If an employee moves roles and they don’t need a car, it may be more difficult to reduce their salary accordingly.

For ‘perk’ vehicles, a salary increase is the only viable approach.

ACURRENT

FLEET COSTS

COMPENSATION SCALEB

ALTERNATIVECOMPENSATION COSTS

3 Decide the best time to make the moveThe ‘best’ time will depend on how you own the vehicles, and more specifically - how quickly you can off load them.

If you own them outright there’s no real impediment to a quick sale, but if you’ve only just purchased them,you might consider selling them further along the lifecycle.

If you’re tied into lease terms however, it will almost certainly be worth waiting until the end of the lease. Because of the sharp depreciation on most vehicles, the beginning of the lease term is where the value of the car is often less than the payout, so it’ll cost to get out of the lease. In this case you’ll need to weigh up the cost, against the gains to be made by eliminating the increased FBT burden.

How to eliminate FBT on a Company Fleet

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4 SummarySince 2011, FBT on ‘company cars’ and ‘perk’ vehicles (travelling over 25,000kms pa) has almost doubled, and in some cases almost tripled, as demonstrated below.

International Accounting Standards

And finally, you should be aware that the International Accounting Standards Board (IASB) and Financial Account-ing Standards Board (FASB) are close to implementing a replacement to AASB 117 Lease. The new standard will require that all operating leases are shown on the balance sheet. Novated leases however, are exempt from this treatment.

The best case scenario is to remove company cars from the fleet as they come to the end of their lease terms. This allows you to remove a depreciating asset at minimum cost to the business. Chances are they’re not all going to reach the end of their terms at the same time however, so you’ll have to prepare for a phased approach.

You now have two options:

1. Respond to the legislation.Accept that the writing is on the wall for ‘company cars’, and move to reduce the tax burden.

ACTION: Begin to phase out ‘company cars’ and ‘perk’ vehicles as and when appropriate, introducing car allowances or salary increases with the option to novate as an alternative. Almost as a by-product, you’ve created a recession-proof Flexible Fleet.

2. Don’t respond.Maintain the status quo and continue to run ‘company cars’ and ‘perk’ vehicles.

ACTION: Nothing. Pay the increased FBT costs, and prepare for your operating leases to appear on your balance sheet. Also should GFC2 arrive, prepare for a parking lot full of cars with nobody to drive them... again.

ANNUAL KM

< 15,000

15,000 – 24,999

25,000 – 39,999

40,000 +

>1 April 2014

20%

20%

20%

20%

>1 April 2013

20%

20%

20%

17%

>1 April 2012

20%

20%

17%

13%

>10 May 2011

20%

20%

14%

10%

<10 May 2011

26%

20%

11%

7%

AboutFor over ten years Autopia has been saving individuals thousands, and organisations millions, by helping them buy, run and sell their cars in the most tax effective way possible.

Whether you’re an employee looking for a novated lease, an employer looking for a benefit program, or a sole trader, business owner or company director looking for the most intelligent way to lower your vehicle costs, we can help. Just give us a call, we’ll take care of everything - you can get back to business.

How to eliminate FBT on a Company Fleet

Intelligent Car Ownership. ACN 109 098 0086

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