Tuesday, 16 July 2013

Motor Vehicles. Why Today's Announcement by the Goverment Could Cost You.

Kevin Rudd formally announced a change in policy concerning the pricing of carbon today. In all honesty this change will have marginal, if any, impact on most of us and the way we live our lives. However one of the initiatives announced in order to pay for this change will end up impacting a lot of small businesses out there, and it has nothing to do with electricity.

Fringe Benefits can mean a lot of things, but in an employment setting it relates to all the non-cash  benefits you get, or have access to. Up until 1985 this was a lucrative part of a person's overall remuneration, and included company paid restaurant meals, entertainment, and certainly the use of company cars for private use.

A lot of that changed with the instroduction of Fringe Benefits Tax by the Hawke Government in 1986. Almost overnight, those business involved in corporate entertainment, such as restaurants, saw their sales smashed as many businesses sought to reduce their exposure to this new tax by cutting out the entertainment altogether.

Fringe Benefits Tax affected a whole variety of other non-cash payments as well, including low interest loans, housing benefits, discounted stock and motor vehicles.

Motor Vehicles were always going to be a tricky part of Fringe Benefits Tax law, as a lot of cars are genuinely used for business purposes. Think of people in sales or itinerant contractors and professionals, driving from client to client to client, every day. "Cars aren't a fringe benefit, they are a necessary part of doing business", was the argument from the corporate sector. And, to an extent, the government agreed.

Fringe Benefits Tax on cars were therefore allowed to be calculated in one of two ways. The first was by calculating the private use of a car, after completing a log book for 12 weeks showing what that private use was (The Operating Cost Method). Great for some, especially if you could keep the necessary paperwork showing high business use.

The other method was a calculation involving the price of the car and the total kilometres travelled. This was known as the Statutory Formula Method. This ended up being the default calculation for those unwilling, or unable, to keep log books.

A couple of years ago the Statutory Formula Method got a bit of a make-over. Up until then, the more kilometres you drove annually, the smaller the effective calculation was. For example the Fringe Benefits Tax was calculated based on 7% of the cost of the car if you were driving more than 40,000 km annually (as opposed to 26% of the cost of the car if you drove less than 15,000 km per year). If you drove a lot (and not necessarily for work purposes either) you could significantly reduce your exposure to this tax. The changes that were brought in were to scrap (over time) the different percentages so that eventually the Fringe Benefit was going to be calculated based on 20% of the cost of the car. The Operating Cost Method was still allowed.

Today's change will effectively scrap the ability to use the Statutory Formual Method on any car bought as part of a salary package from today onwards. Any existing cars used in salary packaging will still have the two options available to calculate the least amount of Fringe Benefits Tax Payable.

"So what?" you might ask. As a small business owner, especially one operating in a company or trust structure that owns your car, this change could potentially cost you a couple of thousand dollars a year in tax. Think about this:

  • You currently own a car and are considering trading it in for a new one. You have never kept a log book and have been happy to use the Statutory Formula Method to calculate the Fringe Benefit Value of the car.  If you change the car now, that option goes out the window.  Do you delay that purchase? For how long?
  • Your business has salary packaged not only your car, but your spouse's car as well. The spouse's car needs changing.  How useful is it going to be to keep a log book for that car? What do you do with the salary packaging there?
  • You bite the bullet and start a log book for your car. You use the car for private purposes more than you thought. How will this impact on your tax?
  • You keep a log book and are subsequently audited by the tax office, who reject your log book as being incorrectly completed. Now what?

A lot of questions. Not many answers. Certainly none that are going to provide certainty for an already struggling automotive industry. Salary packaging firms will also feel the pinch. The ABC reported this afternoon:
Shares in McMillian Shakespeare, one of Australia's biggest providers of salary-sacrificing services, plunged by 15 per cent after the announcement before being placed in a trading halt.
If you are not in small business you won't perhaps understand the potential ramifications that this announcement will bring. And bearing in mind that the government believes it will raise $1.8 billion over the next few years, it will affect a lot of businesses.

However, if you are not in small business, think about this. Do you currently get your vehicle salary packaged as part of your employment? You may be a nurse, a teacher, or even a government employee. You don't use your car much for work purposes. The potential cost to you for any car you may want to salary package will be just as significant as it is for a small business owner.

Now, whilst this has only been announced by Government today. a lot of things will need to happen before this becomes law.  If Parliament is recalled before the election you know that both the Liberal and National parties will oppose this tax change. There is also the possibility that the Greens will reject this measure as they don't appear happy with the overall package being announced today. So there is a chance this will not occur this side of the election. If Parliament is not recalled, then this may well become part of the policy platform for the Labor Party. A pretty bold move, given that the unions associated with the automotive industry will more than likely oppose this.  After the election then? Who knows.

Still, this potentially has some pretty nasty ramifications for small business owners, and cannot be ignored.

Tuesday, 14 May 2013

2013 Federal Budget

Last year, on a different blog site, I reviewed the 2012/13 Federal Budget.

If you haven't read it yet, take a few minutes to look over it. Amongst some of my thoughts of that budget I predicted that the $1.5 billion surplus wouldn't happen, as well as GWS failing to win the 2013 AFL premiership. The "My Reaction" part, at the bottom, still stands as true today as when I first wrote that 12 months ago.

Now, unlike past budgets where the facade of secrecy has been paramount, save a few well chosen leaks here and there, this year it appears that a lot of the significant and highly visible aspects of the budget have already been formally announced.

Having said, it's only after Wayne Swan has delivered his (frankly boring) budget speech (his Swan Song? - sorry) that some of the details begin to emerge. A couple of surprises amongst it all too.  But to be honest, this budget could have been far worse than it ended up being.

Let's have a look at those areas that will affect our clients the most:

Individuals and Families :
  • The baby bonus will be scrapped from 1st March 2014 and be replaced with increased Family Tax Benefit Payments, though at lower rates and with lower income thresholds. This means that if you are wanting to get that Baby Bonus, get busy!
  • Those tiny income tax cuts that were going to come in to offset the increase in the carbon price have been deferred as the carbon price won't be increasing. The increase in Family Tax Benefits to compensate for the increase in carbon price has also been scrapped.
  • The net medical expense tax offset will be phased out. If you are claiming them in the 2013 tax year, they will hang around a bit longer. In all honesty this particular "carve out" arrangement makes absolutely no sense to me. And will make no sense for those clients trying to make the claim in future years. A shocking decision, this one.
  • Disaster Income Recover Subsidy payments (but only those made between 3rd January and 30th September this year) will be exempt from income tax. While the exemption makes sense, there should be no date limitations placed. It's another one of those special considerations that make you scratch your head in wonder.
  • Medicare will increase by 0.5% to partially fund the National Disability Insurance Scheme. I personally think this is a fair thing, and probably didn't go far enough. The purpose of the Scheme has absolute merit, and I think that there needed to be "buy in" by taxpayers into the scheme. I think a 0.75% or even 1% increase in Medicare would not have been unreasonable.
  • HECS/HELP discounts for upfront and voluntary payments will be scrapped, removing the only reason why you would want to pay these debts off earlier than they need to be.

  • You may have heard about some changes to make PAYG tax instalemnts monthly payments instead of quarterly. All our clients can ignore this one as the two annual turnover thresholds ($1 billion in 2016 and $20 million in 2017) make this a non-event. Even if it did, this is one of those budget decisions that is effectively fiddling the books, as it doesn't increase the amount of tax raised, just changes the timing of the payments.

The Tax Office:
  • Every year the tax office receives extra funding to support one or more targeted audit operations. This year there a couple of interesting ones:
  • $67.9 million to undertake compliance activity in relation to taxpayers who have been involved in "egregious" tax avoidance and evasion using trust structures. Now from what I understand the word egregious can mean either outstandingly bad or remarkably good. What about normal and legal tax minimisation using trust structures, like pretty much most small businesses out there? Is that egregious? I don't think so, but that doesn't mean that the Tax Office thinks the same way. Stay tuned on this one.
  • The Tax Office will also increase compliance activity targeted at restructuring activity that facilitates profit-shifting opportunities. What the hell does this mean? Does this mean a sole trader wishing to transfer their business into a company or trust structure will be targeted? Changing partnerships? This one may also be one to keep an eye out for, as I reckon there is a bit more to this than meets the eye.

  • More spending on education under the "Gonski" reforms, but cuts to university funding.
  • Lots of spending on new roads, though not much on rail, I see. (Update - Yes, I neglected to include the Metro Rail Tunnel as part of this assessment. Interestingly, the total project is worth $9 billion, 1/3 contributed by Federal Government and 1/3 by State Government. The remaining third will be raised through private sector payments, creating some form of public private partnership. Forgive me for being a bit cynical, but I don't believe this project will go ahead, or not in its current format.)
  • More job cuts to the public service. This comes on the back of already large reductions outlines in last year's budget. Either there has been a lot of excess staff over the last few years, or these cuts are really going to start impacting on the provision of services (has anyone tried to call either Centrelink or ASIC in the last few months? Get through to someone within 30 minutes?)

  • Our local Federal Member (at least until the upcoming election, where we change electorates), Rob Mitchell, has been silent on Twitter tonight. Unlike last year. I think that means no new spending or no new benefits for our area. I guess that's what happens when your community moves into a safe liberal seat.

My Reaction:

Ignore the headline figures as they are meaningless. Every year they are nothing except guesses that the treasury department provide to the Treasurer of the day and then gets trumpeted as though it is gospel. Both sides of politics are guilty of this. And the estimates are almost always poor.

It was about time that the Treasurer stopped the pretence of the importance of budget surpluses. I said as much in my analysis of last year's budget. This was always going to be a tricky budget, coming just before an election that, as most media commentators are predicting, Labor are set to lose. There were no irresponsible hand outs as we saw in Costello's final budget. The big spending packages of NDIS and education have been a long time coming. The continuing spending on transport infrastructure is reasonable. No doubt pain will be felt here and there as some of the spending cuts filter through to programs that we currently get benefits from. But such is life.

The markets shouldn't overreact to this budget. I am sure the media commentators and the opposition will, though.

Abbott and Hockey will have the job in front of them to provide a reasonable response to this budget without sounding like broken records and overusing the words "trust", "dishonest" or "incompetent", as they normally do. But their alternative solution is to do .... what, exactly?  We don't know, because at the moment they don't know. No clue at all.

A lot of people, including most of the media, seem to like bagging the current treasurer's record of economic management. Personally I can't see it. I think our country's current economic performance compares favourably to pretty much any other country in the world. And whilst there is some pain being felt locally, it is nothing like that experienced in Europe and North America.

So, your thoughts now. What do you think?