Background Information

Joe Brown owns an engineering company in Lincoln - Brown Engineers Limited. He is looking at leasing a vehicle but is worried about how much FBT will cost. He comes to you for some advice. On discussing the matter, you determine the following:

• Joe's wife Jill is a shareholder employee and the vehicle is for her
• The Mazda ute they are looking at will cost $40,000 including GST
• The ute will be leased for 3 years and Jill can keep the vehicle at the conclusion of the lease
• Jill won't use the car in the weekends because Joe's car is bigger.
• They want to pay the minimum FBT.

Required:

a) Calculate Jill's annual FBT liability for each of the three years of the lease using both methods available.

When calculating FBT using the tax written down book value method, depreciate using 30% D.V. Assume an FBT rate of 49% and assume that you can get Jill to issue a letter from the company to her, excluding personal use of the vehicle during the weekends. Remember to show your workings.

b) Explain what the Brown's could do to reduce their FBT liability.