Chapter 2

Views on Schedule 5

Overview of schedule 5

Fringe benefits tax

2.2        The fringe benefits tax (FBT) year begins on 1 April and ends on 31 March. FBT is paid by employers and is self assessed. The current rate at which the tax applies is 46.5 per cent.[1]

2.3        A fringe benefit is a non-cash 'payment' to an employee; it is a benefit provided in respect of employment.[2]

2.4        There are a large number of benefits that are caught by the FBT rules. Schedule 5 of the bill relates specifically to car fringe benefits.

Car fringe benefits

2.5        A car fringe benefit arises in situations where an employer makes a car they own or lease available for the private use of an employee. A car is considered to have been 'made available' for private use by an employee where:

• the car is actually used for private purposes;
• the car is not at the business premises and the employee is allowed to use it for private purposes;
• the car is garaged at the employee's place of residence regardless of whether or not they have permission to use it privately.[3]

2.6        In situations where a fringe benefit is provided to an employee, employers are required to pay FBT. Under the existing rules, to calculate the taxable value of a car fringe benefit, an employer can elect to use one of two methods:

(a)        the operating cost method; or

(b)        the statutory formula method.[4]

2.7        Under the operating cost method, employers are required to maintain a log book, for a specified period, as the taxable value is based on the cost of owning and operating the car, reduced by the proportion that relates to business use.[5]

2.8        The operating cost method for valuing car fringe benefits will not be changed as a result of Schedule 5; it will remain available for employers to use.[6]

2.9        The statutory method on the other hand is designed to provide employers with a low compliance cost alternative to the operating cost method.[7] It does this by basing the taxable value of the benefit on the cost of the car multiplied by the relevant statutory formula. The relevant statutory formula is determined by the number of kilometres the car travels in a year. As a result, as the number of kilometres travelled increases, the value of the fringe benefit, and therefore the tax burden that applies to the benefit, decreases.[8]

2.10      Under the existing rules, the statutory rates are:

Total kms travelled during the year	Statutory rate
Less than 15,000	0.26
15,000 to 24,999	0.20
25,000 to 40,000	0.11
Over 40,000	0.07

Source: Explanatory Memorandum, p. 125.

Schedule 5 – the details

2.11      The amendments proposed by Schedule 5 of the bill will amend these statutory rates, replacing all four with a single statutory rate of 20 per cent. The explanatory memorandum to the bill explains that:

[a] flat statutory rate of 0.20 will better reflect the fair value of the private benefit being provided to the employee and places employees with access to fringe benefits on a more even footing with employees whose remuneration consists entirely of salary or wages.[9]

2.12      The change proposed by Schedule 5 will be phased in for new contracts over four years as follows:

Table 1: Timeframe for transition to the new statutory rate

Distance travelled during the FBT year (1 April – 31 March)	Statutory rate (multiplied by the cost of the car to determine a person's car fringe benefit)
	Existing contracts	New contracts entered into after 7:30pm (AEST) on 10 May 2011
		From 10 May 2011	From 1 April 2012	From 1 April 2013	From 1 April 2014
0 – 15,000 km	0.26	0.20	0.20	0.20	0.20
15,000 – 25,000 km	0.20	0.20	0.20	0.20	0.20
25,000 – 40,000 km	0.11	0.14	0.17	0.20	0.20
More than 40,000 km	0.07	0.10	0.13	0.17	0.20

Source: The Hon Wayne Swan MP, Treasurer, and the Hon Bill Shorten MP, Assistant Treasurer, Joint Media Release, Reforms to car fringe benefits rules, No. 50, 10 May 2011, http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/050.htm&pageID=003&min=wms&Year=&DocType=0 (accessed 19 June 2011).

2.13      An employer may elect to skip the transitional arrangements and apply the new statutory rate of 0.20 immediately; this 'opt-in' however, cannot be accessed without the consent of the affected employee.[10]

Transitional arrangements

2.14      Contracts existing before budget night 2011-12 will not be affected by the changes; the existing statutory rates will continue to apply. For an existing contract to apply at that time (budget night 2011-12) requires that a financially binding commitment had been entered into by one or more of the parties.[11]

2.15      Changes made after budget night 2011-12 to contracts entered into before that time, will however be considered to be new commitments and therefore subject to the new arrangements.[12]

Consequential amendments

2.16      Schedule 5 of the bill also contains some minor consequential amendments to update the provisions and ensure that the provisions that will not be required following the completion of existing contracts, grandfathered as a result of the Schedule 5 amendments, are repealed at that later point in time (1 April 2016).[13]

Issues raised

General support for reform

2.17      Submitters to the inquiry were supportive of reform and acknowledged the need for changes to the existing FBT rules for motor vehicles:

The Tax Institute broadly supports the Government’s implementation via Schedule 5 of the Bill of Recommendation 9(b) of the Henry Tax Review (also known as Australia’s Future Tax System Review) that “[t]he current formula for valuing car fringe benefits should be replaced with a single statutory rate of 20 per cent, regardless of the kilometres travelled”.

As The Tax Institute has publically expressed, this measure represents a sensible reform that removes any incentives that may exist for people to drive further for the sole purpose of lowering the fringe benefits tax (FBT) liability resulting from the associated car fringe benefit. The replacement of a sliding scale with a flat statutory rate is also welcomed as a step towards a simpler FBT system.

Once the transitional arrangements contained in Schedule 5 of the Bill cease to apply, the flat statutory rate will result in simpler FBT laws and therefore a lower compliance burden for employers that provide car fringe benefits.[14]

The industry acknowledges that the existing approach, using a kilometre-based threshold, is out of date and is inconsistent with the goal of reducing carbon emissions from motor vehicles.[15]

[The] MTAA agrees the existing rules connected with fringe benefits tax (FBT), as it relates to motor vehicles, would benefit from simplification and will always support good policy and mechanisms that seek to reduce regulatory and other compliance burdens upon small businesses. In that context, MTAA offers its in-principle support to the reforms outlined by the Bill.[16]

2.18      In supporting the reforms, submitters did suggest however that broader reforms to motor vehicle taxation, particularly luxury car taxation, should also be considered.[17]

Possible unintended consequences

2.19      In noting their support for reform of the existing car fringe benefits arrangements, stakeholders raised concerns that the application of the changes may have unintentional consequences for motorists in rural, regional and outer-metropolitan areas.[18] When commenting on the budget measure, the FCAI stated:

Industry will be concerned to ensure that those people who legitimately need to use their vehicle for business purposes are not faced with an unnecessary tax hike as a consequence of this measure... Just because you live a bit further from the city, or in a country town and need to cover longer distances, doesn’t mean you should pay more tax on the car you drive.[19]

2.20      The FCAI urged the committee to consider an alternative statutory rate of 15 per cent so as to minimise the impact of the change on motorists whilst still removing the distortions of the current regime:

Additional analysis contained in a Treasury costing report...shows that of the 570,000 fringe benefit vehicles, 60.4% (344,280 motorists) will be adversely affected by this change. As rural, regional and outer-metropolitan motorists are more reliance on their motor vehicles for daily work purposes, they are also likely to incur a higher burden from this tax increase... Amending ...[Schedule 5 of the bill]... to a flat rate of 15 % would, as discussed in the Henry Tax Review, remove the current distortion to increase vehicle use and result in a more modest increase in taxation revenue.[20]

2.21      The MTAA were also of the view that the reforms may have unintended consequences:

However MTAA believes there will be potentially unrealised and consequential impacts as a result of the operation of the proposed Bill. MTAA has previously observed motor vehicle market distortions fuelled by changed consumer behaviours. This has, on occasion, resulted from delays in implementing new or changed policy, regulations and / or legislation.

Examples include:

- motor vehicle purchase or replacement decisions have accelerated or been delayed creating market uncertainty- particularly for new car dealers;

- the impact of changes on consumer driving habits, particularly in regional and rural Australia where businesses are required to travel long distances.[21]

Unrelated matters

2.22      The committee notes that the Tax Institute has raised a number of concerns that are not within the scope of its inquiry. The committee has referred these issues to the Minister for consideration.

Committee comment

2.23      The committee acknowledges the concerns of the automotive industry however considers that the government's decision to introduce the changes to the statutory rate over a four year period will ensure that affected taxpayers have the time and opportunity to make the necessary arrangements to transition to the new regime.

2.24      The committee concurs with the Tax Institute that additional examples should be included in the explanatory material.[22]

Recommendation 1

2.25      The committee recommends that the Senate pass the bill. The explanatory material should be updated to address the issues raised by the Tax Institute.

Senator Annette Hurley

Chair

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