Adrian Pennino, senior tax manager for KPMG tax consultancy, had a task ahead of him conveying what is a pretty dry topic to the uninitiated.
But his message affects a large number of fleet managers. Everybody in the room at Stamford Plaza on November 17 listened intently as Mr. Pennino enunciated how the fringe benefit tax changes would change things up.
“Experience has shown that compliance with logbooks is increasingly difficult and time consuming for managers,” he said, keen to clarify. “For employers to elect in
to using this approach, there’s a criteria. The fleet must be predominantly a tool-of-trade and have valid logbooks mandated for staff use through policy, the fleet must also be more than 20 cars.”
“The vehicles cannot be offered as part of employee remuneration packaging, nor can the employee choose the type of car and nor can the included GST value on the car be more than the Luxury Car Tax limit. There are more questions in the guidelines than answers, and KPMG is in conversations with the ATO to clarify things.”
Technicalities of the FBT guidelines are a current bugbear of fleet managers and Mr Pennino struck a chord explaining how management solutions are changing rapidly.
“If employers are able to meet those criteria, they’re able to use the average business use for those logbooks for existing, replacement and new cars over the following four years. The guideline changes are not always useful, but changes to technology can be. The main one is automated logbooks.”
Mr Pennino explains there are benefits other than just tax savings. Tax governance is a pointy issue at the moment and he stresses that employers should have
effective controls in place to mitigate tax risks. If or when the ATO conduct reviews, any automate logbook information you collect will look favourably.
“When clients look at this, OH&S is one of the key things they’re looking at. It’s a good deterrent for bad driving behaviour, keeping cars out of panel shops and on the roads meeting client needs.”
“When it comes to complying, there are a number of ‘valid’ logbooks which help avoid that issue of legitimacy. You can also record all the kilometres travelled, sync to calendars and have all that correlating information.”
“There are a number of providers available now and they’re relative inexpensive at around $30 a month, some of which you can simply use for that 12-week period for averaging method for logbooks. Other benefits like rationalising fleet utilisation, car parking efficiency, fuel credit claims. Many providers can also give you practical demonstrations.”
Andy Burgess, from KPMG’s audit division also presented, imparting information on the new lease accounting standards are coming into play, starting with the deadline.
“It’s been an issue for as long as I’ve been with KPMG, since 2007. All leases will come onto the balance sheet effective from January 1, 2019, so primarily for Australian businesses, 31 Dec, 2019 or June 30, 2020.”
Terminology, Mr Burgess said, will subsequently evolve as the standards do. In turn this means keeping a lid on things.
“This means a new definition of the term ‘lease’. It’s about the control and benefit to the lessee,” he explains. “If you have control of an asset, is it a lease? Therefore, does it come onto the balance sheet? You can imagine, if something comes onto the balance sheet, it has to balance – and does that impact key stakeholder decisions? Are you going to lease or outright buy assets or use another method?”
The time to act is not the night before the homework’s due, Burgess reiterates. It’s time to start right now.
“There will be some impacts on existing processes. At the moment operating leases that do not make it onto the balance sheet are generally just trapped in an Excel spreadsheet – you may need to get more complex than that. You may need to do some financial modelling depending on how long the lease is for and whether or not there are any incremental increases in payments during the lease period.”
“At the moment there are items called ‘sale and lease-back transactions’ whereby a fleet may sell an asset but then lease it back from a finance provider. In the past, because they’re treating that as an operating lease that was an off-balance sheet transaction. So the asset they previously owned, the income was recognised as profit or loss and then they just tucked it away at the back of the financial statement. This new scenario may actually see the majority of assets on two balance sheets. You’ll see it on the lesser’s balance sheet, as an asset gathering income. As a lessee, someone who gets the asset, it’ll be on balance sheets as a financial liability and as a right-of-use asset. So it’ll be on both party’s asset balance sheets.”
While this means a lot of work for most fleet managers, there are a few beneficiaries. Those with considerably small contracts will be exempt, but you can’t wiggle round the system.
“The good news is there are some exemptions,” Burgess declared to brighten up a slightly despondent room. “Low value items less than $5000US dollars are just too small to worry about and immaterial to the accounts. The second exempt item is short term leases – leases less than 12 months long – and no, that does not include contracts that look like one month, plus one month, plus one month and so on. These will be interpreted by the intent of the contract, and that is to last for whatever the sum is.”
“You enter a lease, and the first question is what it’ll cost for the duration. Do you recognise the duration amount as your liability? The answer is ‘no’. You recognise it as discounted cash. So the time value of that amount in the final year, is not going to have the same value as it does now, for example. You do what’s called a discounted cashflow model – you’ll end up recognising a portion as your discounted liability. Then, considering the ‘right of use’ asset, and with this you may include any incentives or items that impact the value of the asset. So it’s not always going to equal the discounted liability amount, but it won’t be far off.”
“What that does is inflate your total assets and your total liabilities.We’re bringing this to you now so you can consider your contracts and agreements now to plan for the future.”
Both Adrian Peninno ([email protected]) and Andy Burgess ([email protected]) are available to discuss in further detail any questions you may have from the South Australian Professional Development Forum. You can also channel your questions through AFMA directly at [email protected] and we can do the chasing for you.
Have a safe and enjoyable Christmas and New Year break, we’ll see you in 2017.