Chapter 2


Chapter 2

Key issues

2.1        This chapter discusses the evidence received from stakeholders regarding the 2011 amendments.

2.2        Undertaking an analysis of the impacts of the 2011 amendments at this time is complicated by the transitional nature of the changes. As noted in the previous chapter, if a car obtained under a post-May 2011 contract travels 0–15,000 kilometres the taxpayer will enjoy an immediate decrease in their tax liability, whereas taxpayers whose FBT is linked to a car that travels a greater distance will, all other things being equal, be subject to a higher FBT liability. However, for these taxpayers the increase in the statutory fraction to 20 per cent will occur incrementally over the 2011–12 to 2014–15 FBT years.

2.3        To examine the consequences of the 2011 amendments to the extent possible at this time, this chapter first discusses the evidence received regarding the objectives of the reform, and whether the objectives are being achieved. The evidence received regarding the possible implications of the 2011 amendments once they are fully implemented is then discussed, followed by an analysis of the observable impact of the amendments to date. The committee's conclusions can be found at the end of this chapter.

Objectives of the reform

2.4        As noted in chapter 1, the Henry Review concluded that the pre-2011 arrangements with multiple statutory fractions may create an incentive for individuals to travel additional kilometres to reduce the taxable value of their car, with a consequence of this outcome being increased pollution and road congestion.[1] The Royal Automobile Club of Victoria (RACV), however, contended that salary package vehicle leases are 'primarily marketed at drivers already driving at a higher mileage than average'. It argued:

There have been claims that some drivers may have significantly increased their annual mileage or driven very long distances close to the end of the FBT year simply to reach a higher kilometre bracket and take advantage of the lower FBT rate under the previous arrangements. RACV is not aware of any scientific evidence that confirms this. Nevertheless, RACV supports the position that taxation policy should not encourage excess driving which can have a negative accident risk exposure and also environmental implications.[2]

2.5        In its joint submission, the Australian Equipment Lessors Association (AELA) and the Australian Fleet Lessors Association (AFLA) advised that it had suggested to the Henry Review that reform to car FBT arrangements should be guided by the following three objectives:

  • addressing the incentive for more car use;
  • achieving consistency in tax outcomes between the statutory formula and the operating costs method; and
  • maintaining compliance ease.[3]

2.6        The AELA and AFLA consider that of its suggested objectives noted above, the 2011 amendments addressed the first and the third.[4]

2.7        The Australasian Fleet Management Association (AFMA), however, questioned why car FBT was 'singled out for special treatment', noting that ten FBT categories were identified by the Henry Review:

The other nine categories were recommended to move to a 'proposed valuation framework' based on 'market value'. The only category singled out for a different treatment is that of 'car benefit' which remains taxed at the original vehicle purchase price.[5]

2.8        The AFMA also suggested that policy discussions about car FBT have focused on novated lease arrangements,[6] although it considers that novated arrangements generally account for less than ten per cent of total fleet acquisitions.[7] The AFMA reached the following conclusion:

From our data it would appear that government has revised the FBT rate on concerns that a portion of novated lease holders were reportedly driving additional kilometres to reduce their personal tax rate. If this group, which is an easily identifiable sector of the market, were of concern to the ATO then any change should have been directed solely at this group, the novated lease segment, and not at the company vehicle market as a whole.[8]

2.9        Finally, the AFMA also questioned why the 20 per cent statutory rate was chosen. Although it supports a fixed statutory rate, 'it is disappointed that government chose the opportunity to burden the industry with an additional $2.4 billion tax when the 20 per cent approach is fully implemented'.[9] When possible reform to car FBT was being considered, the AFMA favoured a statutory rate that would be revenue-neutral. It advised the committee that it believes such a rate would be around 11 per cent.[10]

Possible implications once fully implemented

2.10      The RACV considers that once the transition to the final statutory rate of 20 per cent has been completed for all taxpayers, 'there will be advantages for the consumer in terms of a simpler calculation of tax liability'. However, the RACV added that in the interim period where the transitional arrangements are in effect, the annual changes to statutory fractions until the 20 per cent rate is reached is likely to make it 'more difficult for consumers to readily understand the details of the changes'.[11] Nonetheless, the RACV offered the following observation:

RACV believes that the reduction of FBT from 26 per cent to 20 per cent for those motorists travelling less than 15,000km, may act to incentivise the uptake of salary packaging for the average motorist who as stated previously, travels around 14,000 kilometres a year. However the new approach is likely to be a setback for drivers who live far from their workplace or require a vehicle to cover vast distances for various reasons. These drivers will see an incremental increase in their FBT costs over the next few years.[12]

2.11      The AFMA raised some risk management and safety concerns. It suggested that the combination of upcoming changes to international accounting rules and the 2011 amendments may influence over the next six to 18 months how firms decide to acquire or utilise 'tool of trade' vehicles. The AFMA advised that it understands that the accounting change 'will require all lease commitments to be shown on the organisation's balance sheet'. Combined with the FBT changes, the AFMA suggests that disinvestment of fleets by employers may occur to remove the vehicles from their balance sheet and to eliminate any FBT liability and depreciation risk. It suggested that it may result in a rise in 'grey fleets' where employees use their own vehicles and are reimbursed by the employer. The AFMA notes that employers will still have the responsibility for managing risk (although they may not realise this) while their employees 'are likely to purchase used vehicles using criteria based purely on cost rather than safety or sustainability'.[13] The AFMA advised that in other jurisdictions, such as the UK, increased grey fleets 'has given rise to serious issues of OH&S and the organisation's ability to manage risk and meet its duty of care responsibility'. It considers:

There is some certainty that our projection will come to fruition as it provides a large financial saving opportunity for organisations. Anecdotal feedback from several AFMA members indicates that this transition is already underway.[14]

Impact of the changes to date

2.12      The RACV has undertaken some analysis of the 2011 amendments' effect on salary packaging arrangements. The RACV notes that the changes are 'anticipated to impact the take up of leases as well as the driving patterns of lease holders'.[15] It used data available on vehicle leasing contracts where the driver relies on the statutory method. Prior to the 2011 amendments the data indicated that the average distance driven averaged around 25,000 kilometres.[16] From 2011–12 onwards, the data indicated that behaviour may have changed. According to the RACV, the percentage of total customers who travelled between 25,000 and 40,000 kilometres fell from 40 per cent to 32 per cent between 2010–11 and 2011–12, while the percentage of customers in the two lower thresholds, where the tax rate has either fallen or is unchanged, has risen from 57 per cent to 65 per cent (Table 2.1).[17]

Table 2.1: RACV's analysis of salary packaging customer mileage

FBT year

Under 15,000 km

15,000–25,000 km

25,000–40,000 km

Over 40,000 km

2009–10

7%

48%

41%

4%

2010–11

8%

49%

40%

4%

2011–12

10%

55%

32%

3%

Note: The RACV acknowledged that 'the data available is immature and is drawn from the integration of data across two businesses which may not be directly comparable'.

Source: RACV, Submission 1, p. 3.

2.13      The RACV added that although there were indications that drivers were moving to thresholds associated with shorter distances travelled over the FBT year, it noted that the overall average kilometres travelled in 2012 only fell from 23,884 in 2011 to 23,418 in 2012. The RACV reasoned that:

The relatively large reduction in percentage of customers travelling between 25,000kms and 40,000kms together with the relatively stable average kilometres travelled in 2012 suggests that drivers were not undertaking additional or unnecessary travel at the margins in order to reach a lower FBT bracket under the previous scheme.[18]

Specific issue regarding the transitional arrangements

2.14      The committee received evidence raising specific issues with aspects of the 2011 amendments. The AFMA raised concern about how the transitional arrangements could potentially disadvantage employees whose employer has been involved in a merger or acquisition. The AFMA used an example given in the explanatory memorandum to illustrate its point:

[Paragraph 5.34 of the explanatory memorandum] states that "The general intent of the transitional arrangements is to leave employers/employees who have pre-existing commitments (that is, those who have made financially binding decisions, in relation to a particular car, based on the old rules) under the old arrangements".

However, parts of the transitional arrangements examples run counter to this general intent. Example 5.8 "Anna works for X Co, and enters into a novated lease arrangement with her employer in January 2010. The lease runs until January 2013. The car fringe benefit is valued under the statutory formula method".

"On 12 November 2011, Y Co. officially takes over X Co, and Anna is now an employee of Y Co. From 12 November 2011, any car benefits provided to Anna will come under the new arrangements".

Under this scenario the employee will be disadvantaged through action totally beyond their control.

Involuntary acts that affect the employee such as a forced redundancy should not, in AFMA's view, be deemed as a change in contract conditions necessitating a change in the applicable FBT rate.[19]

Views on further changes and reviews

2.15      As acknowledged in submissions and in this report, the transitional phase that the 2011 amendments are currently in means that the impact of the changes in their entirety cannot be fully analysed at this time. Submissions did, however, contain a range of views on what should be done next.

2.16      The AFMA recommended that the FBT tax rate be reduced to a position that would have been revenue-neutral prior to the 2011 amendments. It also recommended that the FBT value of the vehicle be reduced 'so as not to discourage the adoption or inclusion of environmental and safety equipment features',[20] and called for a tax reduction 'for organisations adopting safety or emission reducing technology'.[21] The AELA and the AFLA, however, recommended that no further changes be made to the current arrangements. It argued:

The new framework is now well understood, the transitional arrangements are progressing as intended, systems and procedures have been implemented and modified in the light of experience, and staff training completed. The introduction of the one statutory rate has simplified compliance, parties have certainty in relation to the new rules, and the incentive for greater car use has been addressed.[22]

2.17      The Federal Chamber of Automotive Industries (FCAI) similarly suggested that no changes be made at this time, but recommended that a further review be conducted once the transition to the new arrangements was more advanced:

Of most interest to the FCAI members is the impact that the changes may have on consumer or company behaviour, which will in turn be reflected through the mix and timing of new motor vehicle sales. You may recall that there were some thoughts that the changes may lead to a slower turn-over of fleet vehicles and this of course would directly impact new vehicle supply. FCAI is of the view that it is far too early in the policy implementation phase for any sound conclusions to be reached on this particular aspect of the changed policy. FCAI would recommend that in light of the above the current policy remain in place for a period of a further twenty four months after which stage a further review should be instigated. During that subsequent review if there is evidence of a direct negative impact on sales of new motor vehicles then adjustments to the statutory 20% rate should be made.[23]

Committee view

2.18      It is clearly difficult to meaningfully assess the impact that the 2011 amendments have had at this time. While the committee cannot draw any significant conclusions, the inquiry nonetheless provided an opportunity for those affected by the changes to draw attention to any severe unintended consequences that the 2011 amendments may have had.

2.19      The committee notes the arguments made in evidence regarding how the transitional arrangements could potentially disadvantage employees whose employer has been involved in a merger or acquisition. There is no indication, however, of the extent of this as an issue or if taxpayers are being adversely affected by it. Without clear evidence of a significant group of taxpayers being affected by this scenario, the committee would be reluctant to recommend additional changes that would further complicate the car FBT rules while businesses are already being required to adjust to annual changes throughout the transitional period.

2.20      The committee does consider, however, that a review of the car fringe benefit rules does need to take place at a future, appropriate, time. The committee appreciates the reduced complexity and associated economic efficiency benefits that will be achieved once the 2011 amendments are fully implemented. However, the committee is cognisant of the impact that the 2011 amendments will incrementally have on those who have to travel long distances to earn an income. It follows that those who live in regional or outer metropolitan areas are more likely to be affected by the 2011 amendments.

2.21      Accordingly, the committee considers that the government should undertake a review of car FBT arrangements once the 2011 amendments have been fully implemented after the 2014–15 FBT year. Such a review should consider whether the 2011 amendments have achieved their objectives, whether the 20 per cent statutory rate is appropriate and how the operation of the car FBT regime can be improved.

Recommendation 1

2.22      That in 2015 the Australian government commences a review of the car fringe benefits taxation framework.

 

Senator David Bushby
Chair

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