Tax breaks for cars - a dumb idea

A rent seekers meltdown is now taking place over the government’s decision to change Fringe Benefits Tax requirements on cars.

What has the government done? It has removed the ability for people to use the leasing of a car as an income tax deduction (and also avoiding GST on petrol) by default (known as the ‘statutory method’), without providing any evidence that the car is used for work purposes. Instead people will have to provide evidence via a log book that demonstrates that the car is a genuine working expense.

Outrageous isn’t it?

The statutory method of calculating fringe benefits tax on cars was originally introduced as an alternative to the administrative pain of keeping a log book. Instead of producing a log book, the tax department would assume a certain proportion of work use for a car based on how many kilometres the car travelled in a year. 

It became rapidly and openly rorted. I even took it up (although it probably didn’t save much on tax on reflection).

Leasing and salary packaging companies sprung up to exploit the loop hole, as did fuel card companies.

The end of year cross country trip to clock up the kilometres on the car over key statutory method thresholds became something of folklore in offices offering salary packaging to employees. One would also regularly hear the anecdote of people lending their car to friends and families to do a return trip from Melbourne to Sydney. And then there was the March scramble to get the kilometres up to the threshold you’d nominated to the tax department before the FBT year ended. 

It was madness.

It meant other taxpayers had to pay more in tax (or suffer longer in hospital waiting queues), so that someone else could subject their children to extreme boredom in the back seat of a car. And then there were all the petrol receipts you had to hang onto, photocopy and send into the salary packaging company.

And of course there were thousands of people needlessly employed to administer the tax loophole. These people could have been doing something more productive with their time, like helping someone in a hospital waiting queue, rather than processing petrol receipts.  And naturally you could also be doing something more productive with your time, than checking up on these people as they inevitably made clerical errors in processing your receipts.

Yes, Joe Hockey is right, there are people who benefit from the car tax deduction who don’t earn large sums of money. Woefully underpaid nurses in particular receive a large FBT exemption which makes salary packaging incredibly attractive. But so do surgeons who aren’t exactly low paid.

And yes, I’m sure a few Australian-made Commodores and Falcons are salary packaged. But so are plenty of German-made BMWs and Mercedes.

Here’s an idea.

If we think nurses are underpaid let’s pay them more, rather than provide an FBT exemption open to a range of people who aren’t underpaid. 

If we want to help not-for profits attract good quality staff let’s give them concessional income tax scales.

We could then leave it up to these nurses and not-for-profit employees whether they want to use the extra cash to pay for a new car and petrol if that’s what they’d like. But no doubt many would prefer to spend this money on something else which would make them happier. And we’d free them and their employer from the administrative hassle and cost of dealing with salary packaging.

In addition people who are very well paid will pay a fairer share of their tax obligations.

Yes some people will lose jobs in salary packaging and leasing finance companies and in car dealerships. No doubt many of them are lovely people whose employment we should be concerned about. But the economy will be undoubtedly better off with these people employed in other careers providing services that people would prefer to a new leased car.

What about the Australian car manufacturing industry I hear you say. If you think they need more subsidies, then wouldn’t you want taxpayers’ money targeted at these locally made cars rather than dispersed across BMWs, Mercedes and Hondas as well?