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Federal Budget 2011: Honk your horn, the fringe benefits tax is changing

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…

Danieldionne
Being paid to drive is becoming a thing of the past. Daniel Dionne/flickr

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.

More on this topic:

Paid to drive: the government’s split personality on transport emissions

Under-investment in public transport: has ACF got it right?

Join the conversation

Comments (9)

  2. Permalink
    Michael J. Lew

    Michael J. Lew

    (Senior Lecturer, Pharmacology at University of Melbourne)

    Hooray! At last we are going to be rid of tax that was obviously perverse from the beginning. What is the next bad tax break that should be publicised and discussed? We need to being now so that it might be dealt with this century!

  3. Permalink
    Paul Brown

    Paul Brown

    (logged in via Facebook)

    The writer fails to understand the true value of a vehicle. FBT is designed to tax on a yearly basis a value that represents fair value of the benefit recieved. Depreciation of the vehicle is not allowed in the first few years, however vehicles driven at high mileage depreciate excessively. E.G an $80,000.00 Audi A4 2009 model with 100,000 km has a value of only $30,000.00. Ford territory purchased for $60,000.00 traded in for $24,000.00 2 years later with 100,000 km, Volkswagen ute purchased $52,000.00 sold 2 years later with 90,000 km $15,000.00. The reduction in rates for high mileage helped to offset this true value. A fairer system would be to allow true depreciation annually with a fixed rate of FBT. Thus ensuring the tax reflects the true value of the benefit.

    1. Permalink
      Chris Riedy

      Chris Riedy

      (Associate Professor at University of Technology, Sydney)

      Paul, I do understand the true value of a vehicle and I agree with you. As long as the rate of FBT is fixed so that there is no perverse incentive to drive more, I think it's fine to put in place a fairer system to measure the actual value of the vehicle.

  4. Permalink
    Paul Richards

    Paul Richards

    When FBT was introduced, purchase of vehicles shifted dramatically from private ownership to business and government. If we have a balancing of this shift, we may see the big players in the automotive industry getting extremely agitated at the change. There could be a need to give greater value than a three year lease allows.
    The fine detail will be interesting to observe, because the media has been very quiet on FBT change.

  5. Permalink
    David Bartolo

    David Bartolo

    (logged in via Facebook)

    Accepting the fact that a flat rate is the way to go, are there any details on how this will be phased in especially for those who may have signed up to a 3 year contract after the 10th of May? I normally do 25,000 km without having to do extra trips in March and to nearly double the FBT cost may sway me in keeping my car instead of renewing it. And since the vehicle does depreciate in cost each cost, why is the FBT still calculated on the original grossed up value?
    I think the losers hear will be the car industry rather than the individuals.

    1. Permalink
      Wayne Monfries

      Wayne Monfries

      (logged in via LinkedIn)

      I have the same issue that Paul Brown brought up about residual value. I do just over 40,000 km /year the majority of which is just travel between home and work. This was the cheapest place I could afford within reasonable commuting distance of work where I wouldn't end up with mental health issues (I tried living in town in a few places and it just didn't work for me). I worked for the ATO for 16 years and I've seen a lot of unfairness in the system. Most of the unfairness is because people…

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  6. Permalink
    mark gontar

    mark gontar

    (logged in via email @gmail.com)

    So never mind the people who actually travel long distances for work. Increasing the FBT levy to 20% of base value regardless of kms travelled means I will end up using an older and less efficient vehicle to do those 25000+ km a year. Well done Chris - you got your way.