Chapter 1
Introduction and background
Referral and conduct of the inquiry
1.1
The Tax Laws Amendment (2011 Measures No. 5) Bill 2011 was introduced
into the Parliament on 2 June 2011. It was an omnibus bill that sought to
implement a number of distinct changes to Australia's tax laws. Schedule 5 to
the bill proposed amendments to the Fringe Benefits Tax Assessment Act 1986
(FBTA Act) to reform the fringe benefits tax (FBT) arrangements that apply to
cars provided to an employee or their associate in respect of employment.
1.2
The changes to the car FBT rules became law on 29 June 2011 after the
bill was passed by the House of Representatives and the Senate[1]
without amendment and the Royal Assent was received. During the debate in the
Senate on the bill, however, a resolution was agreed to requiring the Senate
Economics References Committee to undertake a review of the operation of the
amendments to the car FBT rules 12 months after their commencement. The
committee is to report the findings of the review to the Senate no later than
12 months after commencing the review.[2]
1.3
The committee advertised the inquiry on its website and in The Australian.
The committee also wrote to relevant organisations to invite submissions. In
total, four submissions were received. Details about this material can be found
in Appendix 1. The committee thanks the organisations that provided evidence
for this inquiry.
Structure of this report and explanatory note
1.4
This report consists of two chapters. The remainder of this chapter
provides some background information about the arguments for reforming the car
FBT rules and explains the changes that were made. Chapter 2 examines the
evidence received by the committee during the inquiry.
1.5
The amendments that were the focus of this inquiry—that is, the
amendments contained in part 1 of schedule 5 to the Tax Laws Amendment (2011
Measures No. 5) Act 2011—are referred to in this report from this point
onwards as 'the 2011 amendments'.
Car fringe benefits
What is a car fringe benefit?
1.6
A fringe benefit is a benefit provided in respect of employment to an
employee (or their associate, such as a family member) in place of, or in
addition to, salary or wages.[3]
A car fringe benefit generally arises where an employer makes a work car
available to an employee for the employee's private use.
How are car fringe benefits valued
and taxed?
1.7
FBT is paid by the employer, although employers can seek contributions
from the employee towards the FBT liability.[4]
An FBT liability is calculated as follows:
FBT = A * B * C
Where:
A = the
taxable value of the fringe benefit
B = the
FBT tax rate (currently 46.5 per cent, which is equal to the highest marginal
income tax rate plus the Medicare levy)
C = the applicable
gross-up rate[5]
1.8
As two of the terms on the right-hand side of the above equation are
linked to tax rates which change infrequently, the taxable value of the fringe
benefit is the variable that has the greatest influence on an FBT liability. The
FBTA Act provides two methods for calculating the taxable value of car fringe
benefits—the operating cost method and the statutory formula method:
- The operating cost method relies on the separation of the
actual operating costs of the car incurred as a result of business and private
use. That is, the value of the fringe benefit is based on the cost of owning
and operating the car (including depreciation, registration, and insurance),
reduced by the cost related to the business use of the vehicle. This requires
employers to keep a log book.
- The statutory formula method is provided as a less
burdensome alternative to the operating cost method. The taxable value of the
fringe benefit is calculated by reference to the number of days in the year
that the fringe benefits were provided by the employer, rather than by
reference to whether the vehicle was used for business or private purposes. Under
this process, the taxable value of the fringe benefit is calculated by
multiplying the base value of the car, the proportion of the year that the car
fringe benefits were provided to the employee and the applicable 'statutory
fraction' (discussed further below). This amount is then reduced by the amount of
any contribution by the employee, such as an amount paid directly by the
employee to the employer for use of the car or a contribution to operating
costs.
Recent reform to the tax treatment of car fringe benefits
1.9
Prior to the 2011 amendments, the statutory fraction that applied under
the statutory formula method was dependent on the number of kilometres
travelled during the FBT year (1 April – 31 March). The tax rates decreased
from 26 per cent to seven per cent as the distance travelled passed 15,000,
25,000 and 40,000 kilometre thresholds.[6]
Accordingly, the taxable value of a car fringe benefit falls as kilometres
travelled increases.
1.10
Many reports discuss the statutory formula method for determining the
value of car fringe benefits, however three reports in particular help explain
the origin of the 2011 amendments. They are the:
- the Senate Standing Committee on Rural and Regional Affairs and
Transport's 2007 report Australia's future oil supply and alternative
transport fuels;
- the Senate Rural and Regional Affairs and Transport References
Committee's 2009 report Investment of Commonwealth and State funds in public
passenger transport infrastructure and services; and
- the 2009 final report of the Australia's Future Tax System Review
chaired by Dr Ken Henry AC (also known as the Henry Review).
Reports by Senate committees
1.11
The Senate Standing Committee on Rural and Regional Affairs and
Transport in its 2007 report Australia's future oil supply and alternative
transport fuels, recommended that the government review the statutory
formula in relation to FBT of employer-provided cars 'to address perverse
incentives for more car use'. The committee noted that the concessionary
treatment of car FBT 'encourages car use for peak hour commuting, and now seems
to serve little of its original purpose',[7]
although it added:
It should be stressed again that the question of whether the
tax should be concessionary is different from the question of minimising
compliance costs. A statutory formula method can be retained for the sake of
easy compliance, while the concessionary aspect can be removed by adjusting the
rates.[8]
1.12
In August 2009, the Senate Rural and Regional Affairs and Transport
References Committee similarly called for the statutory formula method to be
amended to remove the incentive to drive excessively to reach the next
threshold. The committee accepted arguments put to it that this incentive
'encourages a car culture in the workplace, contributes to traffic congestion,
and hinders the take up of public transport'. Observing that the statutory
formula may also be implicitly providing assistance to the car industry, it
also recommended that the government 'should state the purpose of concessionary
FBT of cars more clearly, and investigate the likely effects of making it less
concessionary'.[9]
Henry Review
1.13
The Henry Review concluded that the structure of decreasing statutory
fraction value based on greater number of kilometres travelled may, at the
margin, 'encourage individuals to travel unnecessary kilometres'.[10]
Data published by the Henry Review illustrates its concerns about the incentive
(Figure 1.1).
Figure 1.1: Number of vehicles by kilometres travelled (2007–08 FBT
year)
Source: Australia's Future Tax
System Review, Australia's future tax system: Report to the Treasurer,
part 2: detailed analysis, vol. 1, December 2009, p. 46. Based on SG fleet's
submission to the 2009 Review of Australia's Automotive Industry, as cited in
the Federal Chamber of Automotive Industries' submission to the Henry Review.
1.14
The Henry Review recommended that the current formula for valuing car
fringe benefits should be replaced with a single statutory rate of 20 per cent
that would apply to the original cost of the car regardless of the kilometres
travelled. It argued that:
This approach would provide a more neutral taxation treatment
for employee remuneration by reducing the concessions available to those who
can take their income as a private car benefit. It would also remove any
incentive for individuals to drive unnecessary kilometres to access a lower FBT
rate. Under this approach, the operating cost method would be retained.[11]
The 2011 amendments
1.15
The amendments contained in part 1 of schedule 5 to the Tax Laws
Amendment (2011 Measures No. 5) Act 2011 implemented the Henry Review's recommendation
on the taxation of car fringe benefits. For new contracts where the statutory
formula method is used, the multiple rates are replaced with a single statutory
rate of 20 per cent regardless of kilometres travelled. The operating cost
method was not changed. The amendments apply to new contracts entered into
after 7.30 pm (AEST) on 10 May 2011[12]
and are phased in over four FBT years, as indicated by Table 1.1.
Table 1.1: Statutory fractions applicable to valuing car fringe
benefits under the statutory formula method
|
Distance travelled during the FBT year
|
Statutory fraction
|
|
Pre-10 May 2011 contracts
|
New contracts agreed to 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
|
1.16
The explanatory memorandum which accompanied the bill advised that the
previous approach taken to taxing car fringe benefits was based on an
assumption that as distance travelled increases the business use of the vehicle
also increases. However, the explanatory memorandum argued that this assumption
pre-dates salary sacrifice arrangements and 'no longer reflects current vehicle
usage data'.[13]
The explanatory memorandum concluded that a flat rate of 20 per cent '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'.[14]
It also noted that cars which are currently exempted from FBT, such as where
there is only limited private use of a taxi, panel van or ute, will continue to
be exempt.[15]
1.17
As Table 1.1 indicates, moving to a flat statutory rate impacts groups
of taxpayers differently. For taxpayers entering into new contracts that fall
into the
0–15,000 km bracket, the statutory fraction decreases from 26 per cent to 20
per cent. These taxpayers are better off. Under the transitional arrangements,
they also enjoy the benefits of this immediately. Taxpayers that fall into the
15,000–25,000 kilometres do not experience any change to the statutory rate,
although there may be some benefits through easier compliance. If a car travels
more than 25,000 kilometres the taxpayer will, all other things being equal, be
worse off. The short‑term impact of these changes, however, is lessened as
they are phased‑in over four years; for example, for cars that travel
more than 40,000 kilometres the seven per cent statutory rate that would have
applied without the amendments will increase to 10 per cent, 13 per
cent, 17 per cent and finally to 20 per cent over the 2011–12 to 2014–15 FBT
years.
Revenue implications
1.18
An important aspect of the 2011 amendments is that, with the statutory
rate that has been chosen, the government is expected to increase the revenue
it receives from car FBT. Over the forward estimates from 2010–11 financial
year, the changes are projected to raise over $960 million in revenue for
the government.
Table 1.2: Projected fiscal impact
of the 2011 amendments ($m)
|
2010–11
|
2011–12
|
2012–13
|
2013–14
|
2014–15
|
|
5.0
|
29.4
|
140.4
|
331.2
|
455.9
|
Source:
Explanatory memorandum, Tax Laws Amendment (2011 Measures No. 5) Bill 2011,
p. 6.
1.19
At the time when the 2011 amendments were announced, it was projected
that the changes would increase GST payments to the states by $50 million and
decrease Australian government expenditure by almost $34 million over the same
forward estimates.[16]
As the move to a single statutory rate of 20 per cent makes taxpayers who fell
into the two brackets with the lowest kilometres travelled (0–15,000 and
15,000–25,000 kilometres) either better off or the same as they were before, it
follows that the projected increase in revenue for the government comes from
taxpayers who provide a fringe benefit that relates to a car which travelled
more than 25,000 kilometres.
1.20
The implications of the amendments for the government's financial
position can be considered in another way. The design of the statutory formula
results in a concession being provided to employees who can receive a favourable
tax outcome by taking part of their income as a private car benefit. Following
the 2011 amendments, the value of the concession provided by the government to
taxpayers via the statutory formula is estimated to decline from around $1.2
billion in 2011–12 to $690 million in 2014–15 (Table 1.3).
Table
1.3: Details of tax expenditure estimates for the application
of the statutory formula to value car benefits ($m)
|
2007–08
|
2008–09
|
2009–10
|
2010–11
|
2011–12
|
2012–13
|
2013–14
|
2014–15
|
|
970
|
910
|
900
|
1,070
|
1,220
|
970
|
800
|
690
|
Source:
Australian Government, 2011 Tax Expenditures Statement, January 2012, p.
141.
Navigation: Previous Page | Contents | Next Page