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NEWS - PLANNING
Add real mileage to tax savings on your car
3/31/2005
Salary packaging your car is a common strategy but it's not always the smartest option. There are other ways to cut costs not only on your own vehicle but those of your family as well.
Driving courtesy of the company encourages people to spend too much on a car, says financial planner Rowan Wall of Eclipse Financial Group, and often the tax concessions don't make it worthwhile.
"When you take into account fringe benefits tax it just isn't worth it," Wall says. "What you're saving by packaging you're losing in FBT and the savings aren't there. The savings are so minor - often only $2000 - but there's still such a focus on it," he says.
"And once you've sat down with an adviser for four hours and clocked up a bill of $1200 [discussing packaging and other personal finance], you've saved $600 for packaging a car."
A smarter way to cut car costs is not to salary package but to keep a logbook on your own or leased car - and you've only got to do this 12weeks in five years - to work out the percentage of business use and claim that as a tax deduction off total car expenses.
If the car is used for business or income-producing purposes, these expenses can include registration and insurance, repairs and maintenance, fuel and oil, depreciation and lease charges.
Keeping a logbook also can be used when you package a car, and it's one of the two ways of calculating FBT.
It's known as the actual cost method, as opposed to the statutory method which applies a set formula depending on the amount of private use.
"In most cases, people are too lazy to keep a logbook," says Wall. He cites the example of a company that felt it was paying too much FBT - under the statutory method because its employees wouldn't keep logbooks - and decided instead to pay its employees a car allowance.
The only way employees could cut costs was by keeping a logbook - they got their tax deductions and the company saved "thousands and thousands of dollars" in FBT.
Crucial to keeping a logbook is to clock as many kilometres as you can for business or income-producing purposes.
"You need to think laterally. Instead of flying from Sydney to Canberra for a business meeting, drive - it takes the same time and you've increased the business use of the car," says Wall.
"And you may have investment properties - say in Newcastle and another at Wollongong - which require reviewing from time to time." These trips, of course, are for income-producing purposes and, again, boost business use.
If you are going to package a car, he adds, it's worth doing it for your spouse or child.
"The best person's car to package is your child's [a second-hand car] because the FBT is based on the purchase price of the car," says Wall.
He cites the example of someone buying a car for $3000 - so the FBT was low - but included in the package with no FBT was $2500 comprehensive insurance [higher because of the younger driver]. Also included were maintenance and repairs, likely to cost more because the car was older. He says it can be worthwhile packaging a spouse's car as well. Once FBT is applied, it actually works out a little cheaper compared with paying for buying and maintaining the car out of after-tax dollars.
The other way to package a car is through your spouse via an associate lease. It can be done on a car your spouse already owns or is leasing.
Put simply, your employer leases the car from your spouse for you to use.
An example from accountant Elizabeth Lucas, principal tax consulting with William Buck, shows that an executive is better off by almost $5000 after-tax by packaging a $60,000 car in her husband's name - assuming he's on a lower tax bracket - compared with taking it in her own name.
Her husband leases the car anyway, and pays the running costs, but is paid a mark-up by her employer, which results in him earning $3130 tax free. The other saving is the reduced salary sacrifice of $2624 gross, or $1351 net, which together make up the $4481 after-tax saving, equivalent to an $8700 pay rise.
Lucas points out that for clients who do package their cars, now is the time to get their mileage up because the end of the FBT year is the end of March. Regardless of your business-use ratio, the more kilometres you have on the clock, the less FBT is paid.
"So if you're close to the next FBT threshold and you're using the statutory method, it's worthwhile going on a long drive," says Lucas. "It can be private travel because FBT is calculated on the total travel."
As an example, take Brian and Helen who each salary-sacrifice a $30,000 car.
For both of them, business use is 20 per cent. But Brian's annual mileage is less than 15,000km a year, while Helen's is more than 40,000km.
FBT on Helen's package is just over $2000 while Brian's is more than $8000.
Reproduced from the Australian Financial Review - 24 Mar 2005
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