Rudd's $200m bandage for FBT haste

It’s little wonder that the auto industry’s response to today’s announcement that the Rudd government will provide a $200 million package of as-yet-unspecified assistance to the industry has been disdainful.

Less than three weeks ago, out of the blue and without consultation, the government announced changes to the fringe benefit tax treatment of employer-provided cars to help fund its $3.8 billion switch from a carbon tax to an emissions trading scheme.

The changes will force employees with salary-packaged cars to fill out log books rather than use the statutory method, which deems 20 per cent of the car’s value to be the FBT amount payable. The salary packaging and automobile industries have been in uproar over the changes, which they say will decimate new car sales.

When announced, the changes were forecast to raise $1.8 billion over the forward estimates. Last week’s economic statement said they would raise $2.12 billion from this financial year through to the 2016-17 year.

There are just over a million new passenger vehicles sold in Australia each year. The Australian Salary Packaging Industry Association has estimated that about 21 per cent of those vehicles are employee-benefit vehicles.

ASPIA also says that the local output of the Australian manufacturers – Toyota, Holden and Ford –  is over-represented in the employee benefit segment, with about 40 per cent of locally-manufactured vehicles sold each year ending up as employee benefit vehicles.

That disproportionate reliance on the salary-packaged vehicles means the local manufacturers will be hit harder by the siphoning off of the $1.8 billion than the rest of the sector – 40 per cent of their output effectively faces a new tax.

The $200 million of assistance unveiled today won’t go close to alleviating the loss of volume and the financial impact that  will have on the local industry when the FBT change is ultimately legislated. The Coalition has promised that it won’t implement the changes (although it has also said it will cut $500 million from the industry’s funding).

It also, of course, would help the car manufacturers but provide no consolation for the dealers or leasing companies who stand to be very badly hit by the changes.

Whatever the merits, or otherwise, of changing an FBT regime that was reviewed and simplified in 2011 in reforms that were supposed to raise nearly $1 billion out to 2014-15, the way Kevin Rudd and Chris Bowen announced the changes blindsided the salary packaging industry, the car makers and employers.

A host of private sector employers have frozen their salary packaging schemes. Interestingly, ASPIA says that more than 90 per cent of the vehicles covered by the schemes are provided to either the not-for-profit sector or state and federal government agencies, with more than 70 per cent of the drivers earnings less than $100,000 and the average price of a packaged car $34,500.

If that is the case, what looked like easy and painless picking from rich executives from closing down a "rort" (which, given that it was the specific approach that had been legislated, wasn’t actually a rort) could come back to haunt Labor during this election campaign. Car dealers are reporting an immediate and sharp drop-off in sales in response to the announcement of the changes to the FBT regime.

It also tends to reinforce the view that Labor, particularly when Rudd is leading it, produces policy on the run without consultation or appropriate analysis. If the FBT changes were properly thought through and their impacts understood, why would the government now need to announce a $200 million more of assistance to the manufacturers to help offset the impact of the changes?

It would have been possible to devise a less destructive approach to raising more FBT from salary-packaged vehicles – perhaps by progressively increasing the proportion which the vehicles were deemed to have been used privately over a few years.

That would have given the various industries and employers involved time to both respond to the plan and make their case against it and, if it were to proceed, to adjust to it.