Goods and Services Tax (GST)

The introduction of the Goods and Services Tax (GST) has added new dimensions to many facets of corporate life and the area of Vehicle Fleet Management for Salary Packaged or Novated Lease vehicles has been impacted by the new arrangements.

In order to understand the new arrangements and how they are best managed it is important from the outset to understand how the management program (SMB AutoPak^TM) operates.

SMB Autopak^TM is fleet management software that effectively links financiers, fuel suppliers, maintenance providers and insurers into a cohesive and practical Vehicle Salary Sacrifice program.

As a part of its management function SMB accepts monthly payments from employers on behalf of their employees to run their vehicles. These payments are deposited into Employer Agency accounts held by SMB on behalf of the employers. Each month SMB receives supplier invoices for items such as fuel, maintenance, insurance, lease payments etc on behalf of the employer and pays these invoices from the Employer Agency accounts. SMB also directly reimburses employees for any out of pocket expenses they may incur.

The following flow chart explains this function.

Under the New Tax System, the concept and processes involved in salary packaging a motor vehicle or other salary packaging options, fundamentally, remain the same. The new dimension facing employers is in the accounting and administration of the Input Tax Credits that are available to employers on vehicle running costs, lease payments and other packaging costs made against their employees salary packaging options.

What is an Input Tax Credit?

In the course of everyday business companies are invoiced by their suppliers for the goods and services those suppliers provide.

Under the New Tax System these supplier invoices will include a 10.00% GST.

In the event that the supplies provided form part of a companies normal business expenses then the GST paid on these supplies may be claimed back from the Tax Office by the company in the form of an Input Tax Credit.

Within Salary Packaging arrangements Input Tax Credits are available on most costs associated with running a motor vehicle and other benefits packaged by employees. There are some exceptions and these are covered later in this document.

Some companies however, due to the nature of the work they perform, can only claim partial or no Input Tax Credits for some supplies and these 'Input Taxed' companies will need to notify SMB of their tax status.

Please note that all information contained within this document relates only to non-Input Taxed companies.

What is the most effective way to manage the payment of the GST and the re-crediting of the Input Tax Credits?

After much deliberation and client consultation SMB has established that the most effective way to manage the process is as follows:

1) Each month SMB receives invoices from suppliers (leasing companies, fuel suppliers etc) on behalf of the employer.

2) These invoices note the actual cost of the supply and also note the amount of GST payable on the supply.

3) SMB makes a full payment of the invoice (inclusive of GST) to the supplier from the Employer Agency Account.

4) SMB debits the employees account for the actual cost of the supply only (exclusive of GST).

5) The GST component of the supplier's invoice is effectively 'loaned' by the employer from the agency account.

6) SMB holds on behalf of the employer the original suppliers tax invoices and forwards a monthly summary report of the GST paid.

7) The employer claims an Input Tax Credit on the GST expense.

8) The employer refunds to the Employer Agency Account the proceeds of the Input Tax Credits.

How does an employee benefit from the Input Tax Credit?

In the process described above an employee's fund is only debited by the GST exclusive amount.

In this way the employee benefits from the Input Tax Credit available on their expenses.

This represents a significant benefit to the employee of around 10.00% on each transaction when compared to running the vehicle without using a Salary Packaging mechanism.

Managing the Changes

Given all of the above, the challenge facing SMB was to develop a management program that, in addition to our existing fleet management services, can:

1) Identify those items that generate an Input Tax Credit for the employer.

2) Collect the tax invoices from the various suppliers on behalf of the employer.

3) Forward to the employer each month a summary Input Tax Credit report and will hold the original supplier invoices on behalf of the employer.

4) Receive from the employer cheques for the input tax credits obtained.

The following flowcharts illustrate the process that is required.

Where;

A. An employee contributes a regular monthly payment of $1000 into the SMB Agency Account.
B. The employer (by SMB) is invoiced by and pays for:
 1) Fuel Supplier for $110.00 comprising $100.00 fuel and $10.00 GST.
 2) Leasing Company for $440.00 comprising $400.00 Lease Payment and $40.00 GST.
C. The employer has claimed and re-credits the Employer Agency Account with the GST.

This compares with the individual employee's cash flow diagram

Where;

A. An employee contributes a regular monthly payment of $1000 into the SMB Employer Agency Account.
B. The employee's individual account is debited by:
 1) Fuel Supplier for $100.00 only.
 2) Leasing Company for $400.00 only.
C. The employer's GST re-credits will have no impact on the employee's individual fund however the overall fund remains in balance.

The SMB AutoPak system database has been extensively redesigned over the past months to incorporate all of the above requirements in its day to day operations and reporting systems. The system migration occurred successfully as at April 1, 2000.

Managing Supplier Invoices.

To ensure compliance and to operate effectively within the New Tax System the efficient management of supplier invoices is critical. In order for an employer to legitimately claim Input Tax Credits on vehicle running expenses, invoices obtained from suppliers must be addressed to the employer or employee and handled correctly.

In those situations where an acceptable invoice is not available SMB will not pursue the supplier or the employee to rectify the situation. The expense in question will be debited against an employees account for the full expense inclusive of GST and an Input Tax Credit will not be sought.

In order to maximise the available Input Tax Credits SMB has set about establishing a number of measures and systems designed to minimise the potential for incorrectly completed or addressed invoices to exist.

Unlike Fuel and Lease expenses, where the suppliers are consistent from month to month, the greatest potential for unacceptable invoicing practices arises in the areas of maintenance, replacement items and vehicle repairs.

Repairs now Pre Authorised via an Australia Wide Service Network

To minimise complications here SMB has developed an Australia-wide Dealer Service Network that will replace many of the existing maintenance arrangements. The purpose of developing this network is threefold.

Firstly, it will save employees considerable money in terms of maintenance expenses. All work undertaken on SMB NovaLease managed vehicles will be pre-authorised by our Maintenance Control Department to ensure that the work is carried out to our client's requirements at a minimum of cost. SMB has negotiated discounted labour and parts rates with around 6,000 suppliers throughout Australia.

Secondly, by pre-authorising all work performed SMB can ensure that all invoices for parts and labour repairs or servicing are made out to the employer or employee. In this way all Input Tax Credits claimed by the employer are backed up by the correctly addressed tax invoice.

Thirdly, with our upgraded computer system, an employees individual fund balance will be reviewed each time any maintenance is performed. In this way SMB will have a far more pro-active approach to managing those employees accounts that have a negative balance.

What Supplies will generate an Input Tax Credit?

With some GST transitional arrangements spanning the next five years it is difficult to provide a solution to achieve a 100% capture rate of all Input Tax Credits without the administrative cost of compliance to the employer offsetting any gains that may be available.

With this in mind SMB will capture all Input Tax Credits on the following expense items where those items have been obtained via an SMB accredited supplier:

1) Lease Payments for most leases dated post December 2, 1998. Note: Some financiers have decreed that all their leases, regardless of age are subject to GST due to the renewable nature of the original contract. (eg Esanda Finance)

2) Service, Repairs, Tyres Batteries and Windscreens

3) Fuel and Oils

4) Comprehensive Insurance and Insurance Excess.

5) Road Side Assistance

6) Cleaning and Sundries

An Input Tax Credit is not available on Compulsory Third Party Insurance (CTP 'Green Slips') until 2003. GST is payable however not Input Tax Creditable.

As there is no GST payable on the following item an Input Tax Credit will therefore not be available on:

1) Annual Vehicle Registration

Other Important Issues.

1) GST on Residual Values

Effective July 1, 2000 all Residual Values paid out to the financier will be subject to a GST of 10.00% on that value. The GST is payable on the residual regardless of when the lease was entered into.

Should an employee wish to refinance the residual value with the same financier then GST will not be payable on the residual at this point. (GST will be payable on the new contracts lease payments)

In the event that an employee realises that the residual value of their vehicle plus the GST payable on the residual will be greater than the market value of the vehicle at lease end then the option exists to re-finance their existing lease at this time.

Should an employee be in this situation they should contact their account manager for re-finance options.

2) GST on Lease Payments.

Effective July 1, 2000 Lease Payments on leases taken out on or after December 2, 1998 are subject to a 10.00% GST. While the vehicle is Novated to a 'non Input Taxed' employer the employer will be able to claim an Input Tax Credit for this GST. This Input Tax Credit claim means that the GST will not impact on an employee while the vehicle remains Novated to the employer.

Note: In the event that an employee leaves an employer and commences to make lease payments directly to the financier then the GST will be payable on the lease directly to the financier. Under the New Tax System individuals do not receive Input Tax Credits.

3) Lease Contract Variations or New Novation Agreements.

Any Lease originally taken out prior to December 2, 1998 that has been or will be varied in any way (ie through a new Novation Agreement with a new employer) will be subject to GST as from the date of the varied contract.

4) Recommendations to minimise the impact of the GST.

i) Set the lease terms for the period that you wish to hold the vehicle for and stick to it!

ii) Keep residual values as low as possible within ATO guidelines.

iii) Choose a vehicle that has a history of maintaining its' resale value. There are a lot of unproven vehicles on the market. They should be avoided.

iv) Consider the purchase of a late model used vehicle as opposed to a brand new car. The effects on the used car market are already being felt and used cars can represent extremely good value.