Taxing times ahead as FBT vehicles driven from the field
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.
Frequently Asked Questions about this Article…
Fringe benefits tax (FBT) is an Australian tax introduced in 1986 to capture salary taken as benefits, including employer‑provided motor vehicles used mainly for private purposes. It matters to everyday investors because changes to vehicle FBT rules affect the tax effectiveness of salary packaging cars, employee take‑home pay and company payroll costs.
Under the operating cost method, employers totalled all motor vehicle running costs and determined the private use percentage by keeping a 12‑week log book. The private use component was then calculated by multiplying total operating costs by that private use percentage to get the taxable fringe benefit.
The statutory method calculated the taxable fringe benefit by multiplying the vehicle’s cost by a percentage. Historically this percentage used a tiered scale based on annual kilometres driven — for example the article lists 26% for cars driven less than 15,000 km, 20% for 15,000–20,499 km, 11% for 25,000–39,999 km and 7% for cars driven more than 40,000 km.
Once the taxable fringe benefit was calculated (by either method) it was 'grossed up' to reflect the pre‑tax wages an employee would have needed to earn to cover that private cost. The grossed‑up amount then had FBT applied — the article gives an example where $1,000 private car costs equated to $1,869 before tax at the top marginal rate, and FBT was paid on that amount at 46.5%.
Many employees found salary packaging motor vehicles not tax‑effective because the combination of statutory rates and gross‑up often eliminated any benefit. According to the article, benefits were typically only received for cars driven more than 25,000 km a year and costing less than $57,000, so many people saw no advantage.
The 2011 budget announced the phase‑out of the four‑tiered statutory FBT method for vehicles. By 1 April 2014 the tiers were replaced with a single 20% statutory rate for motor vehicles, which effectively removed the previous tax advantage of salary packaging many cars.
The article notes the final change to vehicle FBT was introduced as part of carbon tax system changes. One environmental argument for scrapping the tax advantage was that the previous system rewarded increased driving (a higher benefit the more a vehicle was driven), so removing that incentive aligned tax settings with environmental goals.
Practically, scrapping the favourable statutory treatment means employees provided with cars primarily for private use can no longer rely on salary packaging to produce a tax benefit in many cases. For everyday investors this reduces a former tax planning strategy and changes how companies and employees approach remuneration and fleet arrangements.
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