Sutherland Shire Council, in southern Sydney, NSW, has minimised its Fringe Benefit Tax (FBT) liability with an innovative overhaul of its light fleet leasing policy.
On 10 May 2011 the Federal Government's amendment to motor vehicle FBT rules came into effect, introducing staged changes, with FBT eventually reaching a flat rate of 20 per cent for any distance travelled after 1 April 2014.
Prior to the Federal Government change, Sutherland Shire Council had managed its motor vehicle fleet to achieve the optimum FBT of 11 per cent, by establishing a set of policy guidelines that encouraged leaseholders to share vehicles and all achieve a minimum of 25,000km travelled annually.
“Drivers that failed to achieve this threshold bore the cost of the additional FBT,” explains Mark Mills, Manager of Fleet & Workshops. “Drivers also faced added costs if they travelled in excess of 32,500km. This was to recognise the additional fuel and wear and tear on vehicles that were travelling significant distances each year,” he says.
Now, the change in FBT have required a re-think of how council addresses the dual aspects of added FBT costs and total cost of fuel consumed, and how best to model lease fees, taking these aspects into consideration.
Net FBT vs. fuel consumption
Net FBT can be thought of as a residual liability, arrived at by taking a percentage of the purchase price of the vehicle and accessories, less all contributions made (including post-tax lease fee payments) by a leaseholder.
When variable lease fee pricing – to account for varying fuel consumption profiles – is introduced into a lease fee model, it gives rise to a range of possible total annual contributions by a leaseholder.
This means it is possible for two leaseholders driving the same vehicle, acquired for an identical purchase price, to have two very different residual (or net) FBT liabilities, depending on their respective total annual post-tax lease fee and other contributions.
Furthermore, the leaseholder who elects a 40,000km per year fuel package will have made such a large overall post-tax lease fee payment contribution, by virtue of paying a higher lease fee, so as to reduce their net FBT to nil. However, this leaseholder will also have consumed far larger quantities of fuel in doing so, for which the leaseholder would be contributing 40 per cent.
The inverse is also true: a leaseholder electing a very modest fuel package, 15,000km per year, achieves a significant fuel saving for both themselves and council, but is left with a larger net FBT as a consequence.
The new model
In order to move from the current lease fee model that does not consider either net FBT liability or variable fuel consumption costs to a model that does, Sutherland Shire Council staff from Finance and Fleet & Workshops set about changing some of the rationale behind the previous model.
The key changes included:
- A set selection of vehicles, divided into ‘classes’;
- Two new classes introduced: light and small sedan / hatch;
- Four main vehicle manufacturers;
- Lease fees elected and based on total annual travel, from 20,000km to 40,000km;
- Changeover duration ranging from two to four years;
- Categorised for general leaseholders and staff on Managers’ Agreements.
Other notable factors adopted as part of the changes were:
- Leaseholder can elect a fuel package annually, at the commencement of the new financial year.
- A tolerance on up to 1000 km above the fuel package threshold is allowed without penalty. Travel above this attracts the 'excess km travelled' $/km rate depending on fuel type and vehicle size.
- Leaseholders electing to take up larger fuel packages may elect to salary sacrifice the component of their payment, provided it does not adversely effect their 'nil' net (residual) FBT liability position.
As a one off, in July 2013 all leaseholders were offered the opportunity to review their vehicle and fuel package selection (i.e. a vehicle amnesty) and those drivers electing to move from larger vehicles and take up modest fuel packages may be allowed to changeover their vehicles outside the policy changeover period guideline.
The model proposed does not pass on the net FBT where it arises wholly onto the leaseholder, but rather shares this residual between the leaseholder and council at a ratio of 40:60.
It also recognises that leaseholders with a net FBT liability are also likely to generate a saving on fuel consumption and this does offset their net FBT liability and still returns an overall favourable position to council.
“It is not possible to predict what council's total motor vehicle FBT liability is likely to be under the proposed model, as a great deal depends on the combination of vehicle type and fuel package elected by individual leaseholders,” says Mills.
“However the combination of saving on fuel consumption at low fuel packages and nil net FBT at high fuel package options should improve the overall position for council when FBT liability and fuel consumption are both considered.”