Car packaging alert

Key point ... making changes to your contract could trigger a higher rate.
Key point ... making changes to your contract could trigger a higher rate.
Key point ... making changes to your contract could trigger a higher rate.

Key point ... making changes to your contract could trigger a higher rate.

Employees with novated leases may start to feel the impact of recent changes to the tax treatment of salary-packaged cars now that a new fringe benefits tax (FBT) year has ticked over.

While those who travel relatively few kilometres will be better off, those who travel a lot of kilometres will be worse off.

The FBT year starts on April 1 and, the way the rules work, any changes to FBT circumstances within the previous 12 months take effect from that date, Deloitte employment taxes partner Elizma Bolt says.

This year, the big consideration is the changes to the tax treatment of both salary-packaged and employer-provided cars that were announced in the budget on May 10 last year.

Until then, four rates of FBT applied to cars depending on how far they were driven in a year. Under the ''statutory method'' of calculating FBT, as it is known, the more you drive, the lower the tax rate.

If you drove less than 15,000 kilometres a year, the FBT rate was 26 per cent. For people close to that tax rate, there was little or no benefit in paying for a car out of their pre-tax salary. Up to 25,000 kilometres, the FBT rate was 20 per cent; up to 40,000 kilometres it was 11 per cent and from there on it was 7 per cent - making a packaged car increasingly attractive, especially for people paying the top personal tax rate of 46.5 per cent.

But last budget night FBT was changed to a flat rate of 20 per cent for distances up to 25,000 kilometres. The two upper travel brackets will transition to the 20 per cent rate by April 2014.

The changes were applied to new contracts entered into from budget night onwards. But they also apply to changes to novated lease contracts from that date, with the tax impact to take effect from April 1 this year.

Bolt says it's not people with new contracts who need to be mindful of the amended rates, because they will have signed up on that basis.

But those with older contracts might have changed their arrangements without realising it might trigger the new rates.

Someone who had been on the 7 per cent rate might find they will actually be taxed at 10 per cent, the transitional rate for the past FBT year, or at the 13 per cent rate that will apply in this new FBT year.

The impact of a higher FBT rate on their pay packet could be quite significant. ''It will definitely impact on their take-home pay,'' Bolt says.

Ultimately, an employee earning $80,000 who travels 40,000 kilometres a year in a $35,000 car will be almost $3000 worse off over the year under the 20 per cent rate, she says. ''They will be $50 a week out of pocket and they will feel that.''

Under the transitional 10 per cent rate for the 2011-12 FBT year, the same driver is $690 worse off and under the 13 per cent rate that started on April 1, they will be $1380 worse off.

Some people will also need to review whether there's an impact on any means-tested government benefits or family support, because fringe benefits are reported on payment summaries and may be counted as income for these purposes.

Bolt says people should talk to their accountant before making changes to their novated leases to check what the impact might be.

Key points

❏The FBT year ticks over each April 1.
❏There are new FBT rates for packaged cars.
❏ Making changes to your contract could trigger a higher rate.
❏ Low-kilometre drivers might want to look at packaging now.

This story Car packaging alert first appeared on The Sydney Morning Herald.