Taxing times ahead as FBT vehicles driven from the field
There has been much wailing and gnashing of teeth due to the final nail in the motor vehicle FBT coffin being hammered in. This is surprising, given previous income tax crackdowns have not caused a similar outpouring of grief. When the tax deduction for entertainment expenses was axed, which resulted in many restaurant failures, barely a whisper was heard.
The fringe benefits tax system was introduced in 1986 to tax salary taken as benefits. One of the most common benefits provided by employers has been the provision of motor vehicles used primarily for private purposes.
Employers have had a choice of two methods for calculating the taxable fringe benefit. The first is the operating cost method. Under this method, all costs for a motor vehicle are totalled. A private use percentage is established by keeping a log book for 12 weeks. The private use component is calculated by multiplying the total operating costs by the private use percentage.
The second is called the statutory method. The taxable fringe benefit is calculated by multiplying the cost of a motor vehicle by a percentage. Originally this percentage differed depending on the number of kilometres a car was driven in a year.
For cars driven less than 15,000 kilometres, the rate was 26 per cent. The rate decreased to 20 per cent for cars driven between 15,000 and 20,499 kilometres, 11 per cent for cars driven between 25,000 and 39,999 kilometres, with a lowest rate of 7 per cent for cars driven more than 40,000 kilometres a year.
Once the value of taxable fringe benefit is calculated, whether by the operating cost or statutory methods, it is grossed up to reflect the wages an employee would have earned before tax. For example, for a person to pay private car costs of $1000, at the top marginal tax rate, they would need to earn $1869 before tax. This taxable amount then has fringe benefits tax paid on it at 46.5 per cent.
Just as is the case with other tax savings schemes, many employees signed up for salary packaging of motor vehicles under the fringe benefits tax system and received no tax benefit. In most cases a benefit was only received for vehicles driven more than 25,000 kilometres a year, on cars costing less than $57,000. When the Labor government was finding it hard to balance the budget it focused on the leak in revenue due to the unfair tax advantages provided under the FBT system.
The first change to motor vehicle fringe benefits was announced in the 2011 budget. It involved the phasing out of the four-tiered statutory FBT method for vehicles. The change meant that by April 1, 2014, there would only be one rate of 20 per cent applying to motor vehicles.
This effectively meant that by having one high percentage to calculate the fringe benefit taxable value it would have not made it tax effective to salary package a vehicle.
It is interesting that this final change to the FBT treatment of vehicles was brought in as part of changes to the carbon tax system. There is an environmental argument for scrapping a tax advantage that increases the more a vehicle is driven. The decision to scrap the statutory method will mean employees provided with cars primarily used for private purposes will no longer get a tax benefit by packaging the vehicle.