Federal Budget 2015 – Workers pushed into higher tax brackets

Hundreds of thousands of Australian workers will find themselves in higher tax brackets after [the] federal budget left tax brackets unchanged.

The failure to reset tax brackets will push the average full-time worker, earning $78,000 a year, into the second-highest tax bracket in 2015-16, with any earnings over $80,000 subject to a 37 per cent tax rate, 39 per cent including the Medicare levy. As a result, the average worker will be slugged an extra $1200 in tax a year, and the average income tax rate will rise from 21.7 per cent to 27.4 per cent over the next decade.

It’s not a pretty picture.

The picture is even less pretty for the thousands of individuals who will pushed into the top tax bracket, which kicks in at $180,000… “This makes the top marginal rate 49 per cent, giving a 10 per cent hike in the marginal tax rate, so beyond $180,000 the employee loses almost half of every extra dollar earned…” notes HLB Mann Judd Sydney taxation services partner Peter Bembrick.

For families at the lower end of the pay scale, increased earnings can also mean the unwelcome end of government benefits, such as family tax benefits.

“It is important that people know their effective tax rate and not just their marginal tax rate to determine if how hard they are working is worthwhile, especially those in the lower brackets,” says the managing director of  BFG Financial Services, Suzanne Haddan.

Prescott Securities senior economist and financial adviser Alan Hutchinson says there are a number of options for taxpayers who are in danger of jumping into a higher tax bracket.

Cutting back on the hours worked is one option, although possibly not the best if there are mortgages and school fees to pay, he says. Another strategy is salary sacrificing into superannuation.

“Salary sacrificing is the main strategy available to people wanting to avoid bracket creep, and it is the one that works,” says Hutchinson.

ipacSecurities head of technical services Colin Lewis says salary-packaging motor vehicles and laptops used for work-related purposes may be an option for some employees as a way of reducing assessable income.

Employees of public benevolent institutions such as public hospitals or not-for-profit organisations are still able to salary-package almost anything including living expenses, education costs, loan and mortgage repayments, rent, credit card payments and bills, he says.

AFR Contributor

*Source Bina Brown – Australian Financial Review

See the full report here.

2014 Federal Budget

FRINGE BENEFITS TAX AND SALARY PACKAGING

FBT rate
The FBT rate is being increased from 47% to 49% to align with the highest marginal tax rate inclusive of the Temporary Budget Repair Levy of 2%. Whilst the increased income tax rate will apply from 1 July 2014, the increased FBT rate will not apply until 1 April 2015. Further, whilst the Temporary Budget Repair Levy applies until 30 June 2017, the FBT rate is to drop again as of 1 April 2017.

Changing the FBT rate also changes the FBT gross-up rates, as follows:

2014-15 FBT year 2015-16 FBT year 2016-17 FBT year 2017-18 FBT year
FBT rate 47% 49% 49% 47%
Type 1 gross-up 2.0802 2.1463 2.1463 2.0802
Type 2 gross-up 1.8868 1.9608 1.9608 1.8868

Salary packaging
The reason for increasing the FBT rate is stated to be “To prevent high income earners from utilising fringe benefits to avoid the levy”. But you would need to salary package a lot of income to take advantage of this 2% differential. For instance, packaging $20,000 would only produce a saving of around $400.

So whilst there appears to be an opportunity in both the year ending 30 June 2015 and the year ending 30 June 2017, for high income earners to take fringe benefits in the period where the lower FBT rate applies, it would only be useful to the extent the employee earns above $180,000 and the minimal savings probably mean they are unlikely to bother.

Not-for-profit caps
In order to protect the value of fringe benefits provided in the not-for-profit sector, that otherwise diminishes with an FBT rate increase, the annual caps for concessional treatment are to be increased. Confirmation of the new amounts has not yet been provided.

FBT rebate
The FBT rebate (currently 48%) is to be aligned with the FBT rate as of 1 April 2015.

Leight Penberthy
Chief Executive Office

*Source Elizabeth Lucas – Grant Thornton Australia

FBT Fact Sheet

THE REAL IMPACT OF THE RUDD GOVERNMENT’S MOTOR VEHICLE REFORMS

Figures consolidated and released today from ASPIA (Australian Salary Packaging Industry Association) confirm that the costings behind the Rudd Government’s proposed motor vehicle reforms are flawed and have been collated without any consultation.

“The data we have been collecting in the days since Mr Rudd announced his policy reforms is tellingly at odds with information the policy appears to have been based on, which raises legitimate questions around the veracity of the Government’s costings,” said ASPIA President Leigh Penberthy.

“For example, the Treasurer and various Ministers have been suggesting that salary packaging is somehow the domain of the wealthy by saying only those that drive high end luxury cars and earn high incomes benefit from packaging. Our data confirms it is actually middle income earners, largely from the not-for-profit and public sectors, who drive modest vehicles that will be hardest hit. Specifically, this would affect teachers, nurses and charity workers who drive everyday cars like Toyotas, Holdens and Fords.”

ASPIA has collected a volume of information from its member organisations and other independent sources, revealing the following:

Unravelling the Government’s $1.8 billion in savings

To date, despite repeated requests from the industry, there has been no explanation from the Government as to how the $1.8 billion in savings arising from the change has been calculated. ASPIA believes the Government’s calculations do not take into account the significant negative revenue impacts that will flow throughout the entire Australian automotive industry (and associated supply chains). Specifically, there are a number of factors that will impact on the Government’s ability to realise $1.8 billion in savings:

  • Job losses:
    • more than 300,000 people are employed directly and indirectly in Australia’s automotive industry according to FCAI
    • are benefit vehicles (as modelled by Access Economics and Lateral Economics in response to the Henry Tax Review) the loss of jobs across the automotive industry and its associated supply chain may run into the tens of thousands
  • Reduced production within this sector and associated job losses will mean lower company and personal tax revenue
  • Reduced vehicle sales means a drop in GST, stamp duty and new car registration fees which ultimately impact on respective State Governments.

Sectors that salary package

ASPIA has reviewed the salary packaging data for over 100,000 vehicles and confirmed the following sector by sector use:

  • Charities & public health – 28%
  • State & Federal Government public servants – 33%
  • Police & teachers – 21%
  • Private sector – 18%

Salary packaging at a glance

ASPIA has reviewed the salary packaging data for over 100,000 vehicles and confirmed:

  • The average price of a packaged car is just $34,500
  • Just 5% of packaged cars are BMW, Mercedes and Audi
  • 35% are made by local manufacturers Toyota, Ford and Holden
  • Over 70% of drivers earn less than $100,000

Salary packaging & new car sales

  • The Government has estimated that the recent decision will not unduly impact the Australian vehicle industry, and yet:
    • There are approximately 550,000 employee benefit vehicles on Australian roads at any one time. This is in addition to the tool-of-trade vehicles owned or leased by a large number of Australian businesses and Federal, State, and Local Government entities;
    • It is estimated that around 21% of new vehicles sold in Australia annually are employee benefit vehicles; and
    • It is estimated approximately 40% of locally manufactured new vehicles sold annually in Australia by Toyota, Holden and Ford in 2012 were employee benefit vehicles
  • In fact, modelling by Access Economics and Lateral Economics shows that removal of the existing FBT arrangements could lead to a fall in sales of locally manufactured vehicles of up to 10.9%
  • It is therefore clear that the proposed reforms will significantly reduce demand for new motor vehicles and will have a disproportionate effect on Australian made motor vehicles (given their large share of benefit vehicle sales).

The complexity of keeping a log book

It is ASPIA’s view that the requirements of a ‘valid’ log book are onerous and will be a significant administrative burden to Australian businesses. It is an oversimplification that logbooks need be maintained only 12 weeks every 5 years. Each of the following instances would require a further 12-week refresh of a logbook:

  • Every time a driver changes jobs
  • Every time cars are rotated amongst staff
  • Every time a driver moves residences
  • Every time a driver moves to another branch or location within their employment
  • Every time driving patterns change

If a log book is considered invalid for any reason then the entire annual cost of an employee benefit car, including all running costs, become taxable at the top marginal tax rate.

Log books mean significantly higher compliance costs for businesses and organisations across Australia, including government, private and not-for-profit organisations.

It is also likely the ATO will also face challenges in monitoring, capturing and verifying this information given its breadth and complexity.

In addition to benefit vehicles, all tool-of-trade vehicles will be required to operate a log book.

Data Sources:

This information has been collated by the ASPIA and is based on data collated from a number of sources including:

  • ABS Motor Vehicle Census
  • AFLA member data
  • ASPIA member data
  • ATO Taxation Statistics 2010-11, Fringe Benefits Tax
  • FCAI: VFACTS National New Vehicle Sales by Country of Origin, December 2012 and FCAI Key Industry Facts
  • Fringe Benefit Tax Analysis Report prepared by Access Economics Pty Limited and Lateral Economics, 16 March 2009

Download the fact sheet

Changes to the treatment of the Fringe Benefits Tax concessions for motor vehicles and Novated Lease

The Federal Government yesterday announced some significant changes to the treatment of the Fringe Benefits Tax concessions in relation to motor vehicles and  a Novated Lease.

As both the CEO of LeasePLUS and the President of the Australian Salary Packaging Association (ASPIA) we remain opposed to this decision. We also note that the Federal Government has used some information that is both misleading and incorrect about who are the users of a Novated car lease.

Leigh Penberthy
Chief Executive Officer

ASPIA Response to announced changes to motor vehicle Fringe Benefits Tax concessions

The Australian Salary Packaging Industry Association (ASPIA) has reviewed the announced changes to Australia’s Motor Vehicle Fringe Benefits Tax concessions and is disappointed that such a significant change to legislation has occurred without appropriate consultation.

ASPIA believes that the changes will hurt Australian jobs and businesses, affecting 320,000 Australian working households.

“The announcement puts at immediate risk thousands of Australian workers who work in diverse industries, supporting the outsourced salary packaging industry. The changes will also have a massive and instant impact on vehicle sales as well as damage a motor industry already under pressure from external forces,” said Leigh Penberthy, President of ASPIA.

Whilst it is a common misconception that company vehicles and salary packaging cars are to the benefit of high flying executives, the average value of salary packaged cars in Australia is less than $35,000 and most users of the benefit earn closer to $70,000 per year.

Far from being wealthy, these Australians are teachers, ambulance drivers and police entering into a long standing taxation arrangement. These working Australian households stand to lose thousands of dollars each year as a result of this decision.

“The proposed removal of the Statutory Formula for company motor vehicles, including salary sacrificed cars will be bad for Australian business. Not only will it introduce unnecessary compliance for all Australian businesses, operating a company vehicle, but it will also hurt hundreds of thousands of Australian working families by thousands of dollars each year,” explained Mr Penberthy.

ASPIA calls upon the Federal Government to announce a moratorium on the proposed changes to allow appropriate industry consultation to occur.

The Association remains genuinely committed to taxation reform designed to increase fairness and compliance with Australia’s benefit taxation laws, however it believes it is important to clarify several points relevant to the current debate.

Download the media release

Announced changes from Federal Budget 2013

Impact from the Federal Budget to affect the NFP and Public Health sectors.

The Medicare levy will increase to 2% from 1 July 2014 to fund the Government’s Disability Care Australia reforms. Revenue raised from this measure will be paid into a dedicated fund administered solely for the purpose of meeting Disability Care funding needs.

In addition to the Medicare Levy, higher income earners without sufficient private health cover will continue to be assessed to a further 1% surcharge.

The increase in the Medicare Levy brings the effective top marginal tax rate to 47%. A number of tax laws apply the top effective rate as a penalty rate of tax. As a consequence, a Bill released today indicating that the new FBT rate of 47% is proposed to come in as of 1 April 2014 – so no transition despite higher Medicare Levy only being effective from 1 July 2014.

  • For Type 1 the new gross up factor will be 2.0802 meaning that allowable packaging cap will become $14,421 for NFP and $8,172 for Public Hospitals
  • For Type 2 the new gross up factor will be 1.8868 meaning that the allowable packaging cap will become $15,900 for NFP and $9,010 for Public Hospitals
  • For the majority of staff utilising salary packaging benefits this will mean a reduction of $150 for NFP organisations and $85 across the Public Hospital sector each FBT year, April to March