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Buying a car under a trust/company and FBT

Discussion in 'Accounting & Tax' started by menty, 6th Oct, 2016.

  1. menty

    menty Well-Known Member

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    I'v just been wondering about the following situation and whether it is worthwhile buying a car under a trust or just under my personal name

    This is the scenario from my limited research and chat with accountant

    I buy a 25K car under Trust with corporate trustee. I am director of said company. I use the statutory formula (20%) method to work out my FBT liability $5000. I pay said FBT as an Employee contribution of 20% (ECM).
    I can then deduct all costs of fuel, rego, insurance etc (which will be over $5000) regardless of percent of private or business use. I can also claim depreciation of 25% per year , being $6250

    If I was to sell the car in year 2, then I would have to pay tax on any amount sold over $18750 (the residual amount). What happens if I sell it for under that amount?

    I'm not sure if this is correct to be honest but I have heard some people with small business do this. Is anyone able to confirm?

    Wouldnt this also mean that it would be VERY worthwhile if the ECM value was much lower than operating expenses? Ie: A $10000 car would have a ECM of $2000, but if there is $5000/year of operating expenses, you would be much better off buying it under the trust than under a personal name. (as there is 3K that you are writing off under tax)
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Depends on use and sources of income etc. Personal Services Income may affect also. GST is also affected. Sale may result in an assessable or deductible amount esp if as a small business the car is w/off under the $20K rule if its eligible.

    The employee contribution would mean no FBT but remember if registsred for GST you must
    1. Use GST inclusive cost of car; and
    2. Add GST to the $5k so the contribution is $5500

    You may also find using actual expenses lessens the contribution amount. You can choose the lesser option. But the actual mtd requires more effort and calculations.
     
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  3. menty

    menty Well-Known Member

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    Ill meet the 80/20 rule for psi

    Actual expenses would be roughly 6000 per year .
    If 5500 is the ECM, then the extra 500$ of expenses is paid with pre tax money ?
     
  4. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    80/20 rule is but one test. it leads onto passing one of the other tests.

    once you have passed the 80/20 test under s 87-15 then need to consider

    1. unrelated clients tests s 87-20
    2. employment test s 87-25
    3. business premises test s 87-30

    and finally when any of those are passed and you have a PSB does Part IVA apply.

    don't know why everyone thinks once you meet the 80/20 test that's it

    note that 80/20 rules is modified for agents if

    (a) you are an agent of the principal but not an employee

    (b) you receive income from your principal for services provided to customers on the principal's behalf

    (c) at least 75 per cent of that income is performance-based commissions or fees

    (d) you actively seek other customers to whom you could provide services on the principal’s behalf, and

    (e) you do not provide any services to the customers, on the principal’s behalf, using premises that the principal (or their associate), owns or has a leasehold interest in, unless you use the premises under an arrangement entered into at arm’s length.
     
    Last edited: 7th Oct, 2016
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  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Actual expenses includes depreciation. If you decide to choose not to use the simpler method which allows pooling then the deduction for depreciation may be $5625 in a full first year (22.5%) based on the Commissioners effective life. Then add interest (?), and all operating costs. Perhaps even tolls. Rego and insurance. Typically I would think $12k+ pa. Of course that comes with the aweful reality of a logbook. Compared to the stat mtd if you think the log (exclude all home/work) will indicate a business use of 41% or more it may be a benefit. If not dont bother.

    Normally the employee contribution is paid by trust distribution. ie Distribution is say $24K and credited to a unpaid entitlement account. The unpaid entitlement would be reduced by a journal for the $5500. So technically you will get $18.5K cash distribution. No pre-tax $ when you consider a trust distribution is assessable. If you have funds owning by the trust no $ changes hands and that trust liability is reduced leaving your full income entitlement available. Provided the trustee resolves of course.
     
  6. menty

    menty Well-Known Member

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    Thanks Paul. I thought ECM was paid with post tax dollars . As it is in a trust structure, does that mean the contribution is paid with pre tax dollars ?
     
  7. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    ECM can be paid pre or post tax even with a company. There may be a tax consequence in some cases but in most instances not.

    Personal circumstances vary eg : If the company owes a Director a bit then why not reduce that indebtedness by book entry ?
     
  8. Rob G

    Rob G Well-Known Member

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    An employee contribution must come from after-tax income, otherwise it does not reduce the taxable value of the fringe benefit.

    Unless the employee's marginal tax rate is 49% (including medicare levy & temporary budget repair levy) then an after-tax contribution is better.

    The trustee will still be incurring operating costs, even if the employee only contributes the taxable value to prevent FBT being an additional cost to the employer.

    Should the arrangement to remunerate the 'employee' who is also a beneficiary appear as a tax scheme with a sole or dominant purpose of securing a tax benefit then the Commissioner may apply Part IVA ITAA36.

    Factors which may put the Commissioner on notice might include the fact that there is no 'salary sacrifice' of the actual car costs or otherwise setoff of that individual's present entitlements. It would be unfortunate if the whole scheme did not make sense in the absence of the tax benefit of obtaining a tax deduction for what is in substance a private car use.

    Are there any other commercial (non-tax) benefits to the arrangement ?

    At least with arm's length employees the 'tax benefits' are a part of remuneration in a form other than salary & wages. In a closely held trust the arrangement may not have the same commercial considerations.

    This is particularly a problem with a trust conducting a personal services business. It may appear as an attempt to divert the income from services provided by an individual which ends up being tax sheltered and split with a related party.
     
    Last edited: 25th Oct, 2016
  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Re Robs explanation v mine.

    Lets assume a dividend is credited to a shareholder loan. The Director is a shareholder. The Director wants to pay their ECM. The ECM is debited to that entitlement. While the sum is untaxed as it is personal funds the receipt of the dividend will be taxed as income with credit for the franking if any applied. A shareholder / Directors loan account with credit funds is sufficient.
     
  10. Rob G

    Rob G Well-Known Member

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    Same thing.

    Your example is still an after-tax contribution by means of set off for a liability. The employee/shareholder derives assessable income when the dividend is credited to their account under s.6-5(4). It becomes a liability owing to the employee/shareholder. The debt may be set off as an employee contribution. It merely relates to cash disbursements being foregone.

    The same would apply with an employee agreeing to a set off for accrued salary entitlement to the same amount as the required employee contribution.

    At this point the income is derived by the employee under s.6-5(4) and they will be assessed at their marginal rate. The balance of the accrued salary is derived when paid.

    The employee's assessable income is unaffected by the reduced cash disbursement. It is not a salary sacrifice arrangement which would involve pre-tax dollars.