Hysteria from interest groups whenever governments announce plans to trim handouts usually indicates an absence of suitable contra arguments. Government plans to change the fringe benefits tax treatment of motor vehicles is a case in point.
How dare the government contemplate reducing allowable claims for motor vehicles’ expenses to amounts actually incurred in earning assessable income?
It’s reminiscent of the outrage that accompanied the curtailing of entertainment expenses, which critics said would destroy the restaurant industry. Before the changes, a little imagination combined with few scruples made it possible to categorise many social engagements as deductible entertainment events when they were really just mutually agreed taxpayer-funded piss-ups.
Before the introduction of FBT, non-cash employee benefits were caught by Section 26(e) of the 1936 Tax Act. However, the two-line sub-section was more honoured in the breach than the observance, and a whole new act, the FBT Assessment Act, replaced it.
Rather than pay FBT on a log-book-determined amount of private use and hence confine motor vehicle claims to amounts actually incurred in earning assessable income, an employer can elect to apply the statutory formula, a percentage dependent on annual mileage, to the cost of the car in order to calculate the amount of fringe benefit.
Following the Henry Tax Review, the statutory formula of 20% was adopted regardless of distances travelled. A $50,000 car now results in an annual fringe benefit of 20% or $10,000, which attracts FBT of $9,600. The value of a benefit is the deemed net value to the employee and is the first step in calculating FBT. Grossing up the benefit and then applying the FBT rate of 46.5% results in FBT of $9,600. The employer claims a deduction for all vehicle costs plus the FBT paid and reduces the employee’s salary accordingly as part of a salary package. The employee receives a reduced salary but not before effectively getting a tax deduction for otherwise private expenses, offset in part by the FBT paid.
If business use is low and one’s marginal tax rate is not too low, it’s worth salary packaging in the manner described. The higher the tax rate and the amount of private use, the greater the tax savings. The median level of tax savings generated by a salary sacrificed car is believed to be about $3000 per annum.
“The simple fact is a minority of taxpayers receive an advantage.”
Colin Brinsden from AAP, as run in The Sydney Morning Herald, says 325,000 taxpayers will be affected by the proposed changes. However, Robert Gottliebsen in Business Spectator reckoned “28 per cent of State and Federal public servants use this system plus one third of teachers and police. In the private sector usage is much less — around 21 per cent of private workers.” My goodness, that’s over 1.5 million employees.
Gottliebsen did get a bit carried away, however, claiming that “currently cars are declared as 80 per cent for business use”. Wrong — 20% of the cost of the car is the value of the fringe benefit, not the implied private use. The use of the statutory formula generally implies business use is quite small, or else the log book method would have been chosen. Cars are used to drive to and from work and by non-working partners and other associates. Forever the clairvoyant, Gottliebsen went on to predict “on the other side coaching classes will be set up to help people do a good job of tax cheating via false log books” to ensure employees weren’t worse off.
Is he serious? Are we that dishonest? Let’s just maintain the inequity rather than give anyone a reason to cheat?
The statutory formula has also been interpreted by some to be a de facto way of subsidising the local car manufacturing industry. There is no evidence the formula was intended for that, nor has it led to more sales of domestically produced cars rather than imported models. Let’s be frank: it increases debt-fuelled private consumption. Why governments should encourage such behaviour is not explained. It’s sometimes said state governments benefit from extra duties, but that simply makes it a type of Ponzi scheme similar to the first-home buyer’s grant.
The statutory formula was intended to make it administratively simpler, but as always, as soon as an arbitrage advantage beckons, a willing army of rent-seekers appear to exploit the situation, in this case via novated leases whereby an employee’s car lease obligations are assumed by the employer along with other vehicle running costs as part of salary sacrifice.
Overlooked in the discussion are small mum-and-dad private companies, which also use the statutory formula although they are not as concerned with salary packaging per se. Using cash, finance leases or loans they simply purchase vehicles for principals and associates. In most cases there’s no limit to the number of vehicles acquired provided they’re used by associates. It would be surprising if there weren’t a few Beemers in the student car park at Geelong Grammar receiving tax subsidies. It’s difficult to pinpoint the arguments for maintaining such inequities.
The need for log books affirming business use will curtail this latter behaviour, especially if is mandated that cars attributed to the same employee keep concurrent log books.
The simple fact is a minority of taxpayers receive an advantage. The Henry Tax Review put forward eminently reasonable principles in recommendations eight and nine that “all forms of wages and salary for Australian resident taxpayers should be taxable on an equivalent basis and without exception” and “fringe benefits that are readily valued and attributable to individual employees should be taxed in the hands of employees through the PAYG system”. To date no one has argued with those principles, least of all Opposition Leader Tony Abbott. Misunderstanding and self-interested hysteria have again replaced reason in the public policy debate.
*John Lawrence blogs on Tasmanian finance matters at Tasfintalk