After 25 years, one of the craziest taxation rules in Australia is about to be fixed.
The federal government is expected to announce a revamp of fringe benefits tax rules for company cars in Tuesday’s Budget, which will remove a senseless and damaging incentive to drive.
This will benefit both the economy and the environment, but more is needed to support truly green salary packages.
The mechanics of the FBT
If your organisation provides you with a car as part of your salary package, you have to pay fringe benefits tax (FBT).
The amount you pay depends on the value of the car and how much of your driving is for private use, instead of business use.
The more you use the car for personal trips, the greater the benefit to you, and the more you get taxed.
At the moment, there are two ways to work out how much of your driving is private use:
1) You can keep a detailed logbook to track actual operating costs for the car and write down which trips are for work and which are not.
This gives an accurate estimate of private use but keeping the logbook is hard work.
2) To avoid tedious record keeping, the Fringe Benefits Tax Assessment Act offers a second, simpler way of working out your private use.
The taxable value of the car is assumed to be a percentage of its total value. The percentage depends on how many kilometres you drive during the financial year.
So what’s the problem?
The act assumes that the more you drive, the more you must be using your car for business.
If you drive less than 10,000 km in a year, you are taxed on 26% of the car’s value.
If you drive more than 10,000 km it drops to 20% of the car’s value, and then drops again to 11% at 25,000 km and 7% at 40,000 km.
Driving a perverse agenda
While this probably seemed like a reasonable assumption when the act was introduced in 1986, it has created a perverse incentive to drive more.
As the end of each financial year approaches, you can reduce your tax bill by driving your company car more.
If you clock up enough kilometres, you will slip into the next tax bracket and reduce what you have to pay.
In an era when reducing greenhouse gas emissions from driving is crucial, any incentive to drive more is bad policy.
Treasury estimates that the formula used in the act undervalues private use of company cars to such an extent that the federal government lost $1.1 billion in tax revenue during 2009-10.
The proposal expected in the budget is to base the FBT on 20% of the value of the car.
The first pit-stop on the road to change
Having a single rate will remove any financial incentive to drive more and will recover some of the $1.1 billion that is currently being lost.
It should also reduce greenhouse gas emissions because people won’t try to clock up extra kilometres at the end of the financial year.
While this is a move in the right direction, an even better measure would be to provide FBT exemptions for public transport tickets and bicycles.
Then companies would be able to offer these instead of company cars, paving the way for truly green salary packages.
The next step will be to encourage people to get out of their cars altogether.
What do you reckon? Are you glad to see these changes to the FBT? Leave your comments below.