Financial Planning and Forecasting

Question: Discuss about theFinancial Planning and Forecasting. Answer: Introduction Traditionally, purchasing a new car always involve two parties namely the buyer and the seller (car dealer). However, with the introduction of the employer in a car purchasing deal, the employees can only save a lot of through a leasing arrangement known as the salary sacrifice and Fringe Benefits Tax (FBT). Likewise, the employees have been saved the stress of doing a lot of paperwork to obtain car loans. This paper will; one, elaborate the application of salary sacrifice and how it works; two, provide examples to illustrate the calculation of salary sacrifice; three, define Fringe Benefit Tax (FBT) and how its introduction would impact the application of salary sacrifice; and four examine the comparison between salary sacrifice and borrowing money to purchase a car. The assignment uses the Australia as the case study because salary sacrifice and FBT is applicable here. Definition of Salary Sacrifice The Salary sacrifice is also known as the remuneration packaging or salary packaging. It refers to an arrangement between the employee and the employer where the former forgoes part of future wages or salary to finance a car while the latter provides them while a benefit of the same value as the foregone salary (Carr Chan, 2004, p. 3). This is a form of novated lease, as it is known in Australia, where an employer (a new party is introduced in a purchase agreement. The employer makes the car payments on behalf of the employee out of the pre-tax income. The whole process is straightforward and simple (HR Block, 2016). How it works Novated leasing via salary sacrifice can be stretched between two and five years after which the buyer (an employee in this case) can either trade the old car for a new model; i.e. a new lease agreement or pay a pre-determined buy-out amount and keep the leased car (The Fleet Network, 2016). Many people confuse novated lease and care to rent. However, it should be understood that car rental that takes place in the airports involves paying a considerable amount of money for already used cars. While, novated lease involves dedicated a particular portion of your salary to pay for a new car (Kluwer, 2016, p. 67). Under salary sacrifice via novated lease, the employer leases a new car on behalf of his/ her employee although the payment responsibility lies with the employee and not the employer. Deductions are paid from the employees salary before the taxable income is calculated which reduces the tax bills for the employee (Insight Accounting, 2016, p. 31). Examples Example One Calculate the amount saved per year by an employee, earning a gross salary of $50,000 annually, who want to purchase a new car with a price tag of $ 27,091 using salary sacrifice. The car is expected to cover 15,000 km per annum under a lease term of five years. The expected total annual cost of operating the car is $ 10,583, GST inclusive. The cost comprises of financial expenses, maintenance fees, Fuel, Tyres, Registration, and Insurance. Solution Savings made using Salary sacrifice Without Sacrificing ($) With sacrificing ($) Gross Salary per Annum 50,000 50,000 Less: motor Vehicle 0 5,422 FBT 0 0 GST from the employee's contribution 0 468.27 Sub Totals 50,000 44,109.73 Add: tax credits (input) 0 961.32 Taxable Income 50,000 45,070 Taxes 9,300 7,747 Net salary before contribution 40,700 37,323 Less: Contribution 10,573.92 5,151 Net Income 30,126.08 32,172 Salary sacrificing benefit in a year 2,045 Note: During the lease term the employee will save a total of $ 10,225 ($2,045*5) Example Two: Determine the amount saved per year by an employee, earning a gross salary of $100,000 annually, who want to purchase a new car with a price tag of $ 67,825 using salary sacrifice. The car is expected to cover 15,000 km per annum under a lease term of five years. The expected total annual cost of operating the car is $ 21,466, GST inclusive. The cost comprises of financial expenses, maintenance fees, Fuel, Tyres, Registration, and Insurance. Solution Savings made using Salary sacrifice Without Sacrificing ($) With sacrificing ($) Gross Salary per Annum 100,000 100,000 Less: motor Vehicle 0 8,860 FBT 0 0 GST from the employee's contribution 0 1,152 Luxury vehicle charge 0 18 Sub Totals 100,000 89,970.00 Add: tax credits (input) 0 1,958 Taxable Income 100,000 91,928 Taxes 26,700 23,551 Net salary before contribution 73,300 86,377 Less: Contribution 21,541.00 12,680 Net Income 51,758.00 55,697 Salary sacrificing benefit in a year 3,938 Note: During the lease term the employee will save a total of $ 19,690 ($3938*5) Benefits of Salary Sacrifice There are several benefits associated with salary sacrifice. First, it is cost effective. An employee pays for the leased car using the pre-tax income i.e. the amount of contribution is not subjected to tax. Second, an employee attains a higher buying power if he/ she obtains the novated lease via a fleet company. That is, the employee would get a larger discount by using the fleet company as compared to obtaining the lease under dealership (Straton, 2016, p. 67). Third, obtaining salary sacrifice via novated lease is flexible. A buyer can easily exchange the car for a new model at the end of the lease period. Depending on the structure of the lease, the buyer can either get a new car at the end of the period or pay the residual cost and retain the old car (Pyefinch, 2016). Lastly, the servicing of the car is done by the fleet company, therefore, saving the employee time that would have been spent seeking the servicing. Likewise, the employee does not incur the servicing cost because the costs are already included in the lease payment (Carr Chan, 2004, p. 5). Definition of Fringe Benefit Tax The employees benefit that arises from novated lease can be subjected to Fringe Benefits Tax (FBT) which is referred to like an individual tax payable imposed by the Federal government on the benefits arising from salary packaging benefits (Australian Government, 2016, p. 5). The employer has the responsibility of paying the FBT on the benefits received by their employees under the sacrificing agreement. The FBT reduces the amount of salary received by the employee. The introduction of the FBT was introduced by the Federal Government of Australia during the 2011/ 2012 budget announcement (Straton, 2016). However, it should be noted that some employers like those in public hospitals, health charities, and public benevolent organizations are not subjected to FBT unless the total benefits offered to an employee exceeds the acceptable threshold (The Fleet Network, 2016, p. 43). How it Would Affect Salary Sacrifice The Fringe Benefits Tax is determined using the statutory Formula method provided by the Federal government. The FBT payable per annum is established by exercising the statutory percentage on the cars FBT Base value (which refers to the purchase price fewer government charges). The figure obtained is then multiplied by the number of days the employee used the vehicle, gross-up factor (which is a constant of 2.0647) and the FBT rate (current standing at 46.5%) (Carr Chan, 2004, p. 11). Conversely, it should be pointed out that the statutory percentage is based on the number of kilometres the vehicle travelled in a year (note that there exist no difference between private and business use). The statutory percentages announced by the Federal government were as follows Kilometres travelled in a year Statutory Percentage 14,999 km and below 26% 15,000 to 24,999 20% 25,000 to 39999 11% Over 40,000 7% Calculating FBT: Example Calculate the FBT tax payable for a Novated lease involving a car with an FBT base value of $50,000 which covers 20,000 km in an FBT year (agreement entered in 2011). The employee has the opportunity of using the car for 365 days in a year. Also note that a full FBT year comprises of 365 days (not a leap year). Solution The taxable Value is calculated as follows; = Base Value * Statutory Percentage * Days available for use/ Days during a full FBT year = $50,000 * 20% * 365/365 = $10,000 Calculating FBT tax payable = Taxable Value * Gross-up Factor * FBT rate = $10,000* 2.0647* 46.5% =$96,600.85 The calculated FBT tax payable is subtracted from the employees package as an expense. FBT is a liability that reduced the savings under the Novated lease. Therefore, the FBT tax payable reduces the employee benefits. Although this is an expense, the employee would still save a reasonable amount compared to either obtaining a loan to finance a car or buying it without salary sacrifice. Comparison Between Salary Sacrifice and Borrowing Money for a Car A comparison between salary sacrifice through Novated lease and car loan indicates that the former comes with much benefit. A loan is financed using a post-tax income while the lease is financed using pre-tax income (HR Block, 2016). The buyer lowers the taxable income leading to more benefits under Novated lease. The same case applies to comparing Novated lease and normal payments for a car (The Fleet Network, 2016, p. 51). Conclusion The study has established that the employees benefit more under the salary sacrificing via Novated lease. This attribute is evident under the calculations comparing financing a car with and without salary packaging. However, it has also been established that FBT tax payable that was introduced by the Australian Federal Government reduces the employee benefits under Novated lease. Irrespective of the changes brought about by the introduction of FBT, employees still enjoy reasonable benefits. References List Australian Government, 2016. Salary sacrifice arrangements for employees, Sydney: Australian Taxation Office. Carr, S. A. Chan, C., 2004. New Zealand?s Fringe Benefit Tax 20 years on: An Empirical Investigation into Employers? Perception. New Zealand Journal of Taxation Law and Policy , Volume Vol. 10, No. 3. , pp. pp. 3-11. HR Block, 2016. What Is Salary Sacrifice?, Sydney: HR Block. Insight Accounting, 2016. Novated leases and FBT explained, Sydney: Insight Accounting. Kluwer, W., 2016. Australian Income Tax Legislation 2016. Sydney: s.n. Pyefinch, J., 2016. Everything you need to know about novated leasing, Australia: Cars Guide. Straton, 2016. Novated Leasing Salary Packaging , Sydney: Straton. The Fleet Network, 2016. What is salary sacrificing, and how can it benefit me?, Sydney: Fleetnetwork.com.