Federal Budget 2014 – “Lifters not leaners”

An old proverb says “people unite over problems but divide over solutions”.  The weight of expectation lies heavily on Joe Hockey’s first Federal Budget to solve many many long standing fiscal problems without creating a war in the voter base over the solutions.  The budget sell is an appeal to a vision of a national ideal that Australians are “lifters not leaners”.  It is a sales pitch with modest increases in taxation and significant cost reduction measures including significant welfare reductions.  In return, the budget deficit will reduce from a projected $49.9 billion in 2014 to $29.8 billion in 2015.

Almost all the tax increase measures had been leaked prior to the budget.  Of 235 pages of budget measures, only 14 pages are devoted to revenue measures.  The headline revenue measure is the 3 year “Temporary Budget Repair Levy” of 2% which applies to income in excess of $180,000.  This increases the personal income tax rate to 49% from 1 July 2014.  To match the personal tax increase, the FBT rate increases to 49% from 1 April 2015.  Interestingly this means that there is a 2% benefit to packaging taxable fringe benefits for people on more than $180,000 between 1 July 2014 and 31 March 2015.  Will we see a salary packaging frenzy in the short term?  The same opportunity arises from 31 March 2017 to the end of the 3 year levy on 30 June 2017.  Indexation of the fuel excise is set to recommence ½ yearly by indexation to movements in customs duty rates on other fuels.  This will hit people at the bowser.

The balance of the budget is devoted to expense measures directed at cost management and reductions and which affects various forms of welfare.  In particular, the reduction in the income limit on primary earners for Family Tax Benefit B from $150,000 to $100,000 will sting the middle class from 1 July 2015 and apply only to children under 6 with a 3 year phasing out for older children.  From 1 July 2015 the Medicare rebate for a standard consultation will reduce by $5 with a doctor entitled to collect a patient contribution which would appear to create a $2 per visit windfall to doctors who choose to collect $7. Patients on concession cards and with children under 16 return to the current rebate after 10 visits each year.

Gens X, Y and late blooming boomers (born after 1 July 1958) will be hit by the increase in the qualifying age for the aged pension to age 70 by 1 July 2035. Pension income and assets threshold increases will be paused for 3 years from 1 July 2017.  The increase in the SGC rate to 12% will be slowed rising to 9.5% from 1 July 2014, remaining static to 30 June 2018 before rising over 5 years to 2023 to 12% and excess super contributions will become refundable.

Students will be affected from 1 July 2016 by a requirement to repay HELP debt at a lower starting income level set at 90% of the threshold that would currently apply, being in the order of $50,638.  However, the rate of repayment will reduce from 4% to 2% of income above the threshold.  The “cost of finance” on unpaid HELP debt will also be increased to a rate matched to the 10 year bond yield capped at 6%. Deregulation of fees for higher education will also shake up the cost of higher education.

What about small to medium enterprises? Not much.  $10,000 per employee to employ a worker over 50 who has been on benefits for 6 months.  A modest reduction in the refundable R&D tax offset of 1.5% applies from 1 July 2014 in anticipation of the drop in the company tax rate to 28.5% from 1July 2015.

All of these measures are of course subject to approval in a post 1 July hostile Senate which would appear to require cooperation with the Palmer United Party.  Early theatrics suggest that this could, at least, be entertaining.

Individuals & families

As a result of the need to improve the budgets bottom line, this years budget has focused heavily on individuals and families.

We note in particular that the changes to the family tax benefit part B will have a significant impact on many family budgets.

Deficit levy of 2% (Temporary Budget Repair Levy)

From 1 July 2014 to 30 June 2017, a temporary three-year deficit levy of 2% will be imposed on individuals with taxable income over $180,000.

A number of other tax rates that are currently based on calculations that include the top personal tax rate will also be increased accordingly (except the Fringe Benefits Tax rate) for the relevant 3 income years.  However to prevent high-income earners from utilising fringe benefits to avoid the levy, the FBT rate will be increased from 47% to 49% from 1 April 2015 until 31 March 2017 (see also companies section on FBT).

Example.  For a taxpayer with a taxable income of $200,000 per year, this results in an additional tax impost of $400 per year or $1,200 in total over three years.

 


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Give your employees a well deserved break…on tax

With the Coalition winning the recent election and scrapping the Rudd Government’s proposed changes to FBT rules on salary packaged vehicles, current low interest rates and high Aussie dollar, now is a good time to negotiate a good deal on a car – and get a tax break too!

Giving your employees the opportunity to purchase a vehicle under a novated lease arrangement provides them with the most tax-effective way to buy a car of their choice for their own use – and at no cost to the business.

To many employers however, the mention of novated leasing immediately brings concerns around administrative burden, FBT liability, requirement for vehicle logbooks and maintenance and perceptions that it only applies to employees who need a car for work or high income earners. It ends up in the too-hard basket.

But novated leasing is not as complicated as it first seems. In fact, by utilising a dedicated external provider (like Prosperity), there is very little the employer needs to do. At Prosperity we provide the complete solution – from the initial consultation with an employee (lease quotes, tax saving calculations etc), finding the vehicle, arranging the finance, to managing the ongoing requirements (payroll deductions, reporting etc).

What is a Novated Lease?

A novated lease is simply an agreement between the employer, the employee and a finance provider/leasing company.

Under a novation agreement, the employer agrees to deduct money from the employee’s salary (each pay period) to cover the costs of the lease payments, registration, running costs, insurance and maintenance costs of the car. These costs are calculated upfront and usually remain constant during the lease period.

During the lease the employee is responsible for the registration, insurance and maintenance of the car. If the employee leaves, then the responsibility of the lease is transferred to them and they must arrange to make their own payments.

At the end of the lease, the employee has a few options; sell the car, pay any residual and own the car outright; keep the vehicle and extend the lease; or trade in purchase new vehicle on a new lease.

Employer Benefits of a Novated Lease

  • You can offer all your employees the extra incentive of a car in their remuneration package – the vehicle does not have to be used for business purposes;
  • It potentially takes away the burden and responsibility of managing a company car fleet;
  • It takes away the necessity of recording the car as an asset or liability in the business;
  • It takes the responsibility of making lease payments away from the employer as soon as the employee leaves their job;
  • It leave no FBT liability. FBT is deducted from employees pay as part of the lease agreement.

Employee Benefits of a Novated Lease

  • No GST is charged on the purchase of the car or on its operating costs;
  • Tax savings are provided through salary sacrifice arrangements as the lease payments are taken out of pre-tax wages;
  • Employees have the freedom to choose their own vehicle;
  • Vehicle can be used unconditionally for both work and private purposes;
  • Employee can get discounts on vehicle purchase price and operating costs – as a result of Prosperity’s purchasing power;
  • Employee has the option to own the vehicle outright at the end of the lease term.

Let’s look at how it works in real life…

Juliet works for an IT company and earns $60,000. She is looking to buy a Toyota RAV4. She has found the perfect one for $35,000. Her employer puts her in contact with a Prosperity Smart Drive consultant and they provide her with a novated lease quote.

Juliet instantly receives a discount of $3,181 on the car as she doesn’t have to pay GST. On a three year lease, her repayments are $1,278 per month which includes all costs (finance payments, CTP and comprehensive insurance, registration, roadside assistance, fuel, tyres and servicing).

As a portion of these costs are taken from Juliet’s pre-tax salary, she ends up $3,290 better off each year as compared to paying for the car out of her disposable income.

Juliet is happy that she saves some money, has the car she wants and she simply puts all petrol and servicing costs on the fleet card provided.

In summary, novated leasing has become increasingly popular over recent years and provides real advantages to both employers and employees.

Talk to us today!