When you hear the words fringe benefits tax do you think of opportunity or do you think of tax and onerous record keeping. If your thoughts go to the record keeping and the tax you are not alone. The good news is there is substantial income tax saving able to be made by using the fringe benefits system. This is especially so of motor vehicles where the saving in tax can be thousands of dollars. However, the extent of this benefit, I find is not that well understood by business owners. Given that a new fringe benefit year has just begun it is timely to look further into this tax saving.
This is a potential benefit for anyone that operates through a company or a trust. A partnership or sole trader cannot obtain this benefit. It does not matter whether you use the vehicle for work or totally only for personal use. It does not matter how many vehicles you use the fringe benefit system for, unless you are caught by the personal services rules. In this case you are limited to one vehicle.
The way you get a tax benefit for a vehicle that is used only a small amount for business or not at all is via a process called the “Statutory Cost Method”. Under this method you can claim a deduction for all the expenses, the interest and depreciation of the vehicle. What’s even better you can claim a GST credit for all the expenses like fuel. When you add the GST saving and the income tax saving a litre of petrol that would normally cost you $1.50 will cost you 93 cents.
To gain all these deductions you would normally have to pay the fringe benefits tax which is at 46.5%. However it is better to make a contribution of the fringe benefit value against your loan account, to the business, and pay no fringe benefits tax. The contribution is calculated as a percentage of the value of the vehicle. For example if you do 25,000 km the percentage is 11%. On a $40,000 vehicle the contribution is $4,400. However the deductions could well be $12,000 giving you a big tax saving. However if you do not travel over 15,000 km in a year the benefit may not be there, unless the vehicle is of very low value.
This is also a good salary packaging benefit to provide to key staff to give them extra after tax pay that does not cost you any more. The best way to do this is get them to buy and finance the vehicle. At the same time you enter into a novated lease arrangement with the employee to pay the lease payments while they work for you. This way if they leave you are not saddled with a vehicle you may find hard to get rid of.
To set the vehicle benefit up you need to transfer the vehicle to your trust or company with the transport department. Then on the 31 March, each year, you just need to record the kilometers you have driven. Apart from that your accountant can take care of the rest of the necessary paperwork.
Are you gaining the most tax benefit from the vehicles you own? If not have a talk to your accountant and see how you could reduce your tax.
Published by Toowoomba Chronicle www.thechronicle.com.au on Saturday 16 April 2011.
