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Economics References Committee-Senate Standing Review of changes to car fringe benefits arrangements Report, February 2013
Review of changes to car fringe benefits arrangements
© Commonwealth of Australia 2013
Printed by the Senate Printing Unit, Parliament House, Canberra.
Senate Economics References Committee
Senator David Bushby, Chair Tasmania, LP
Senator Mark Bishop, Deputy Chair Western Australia, ALP
Senator Doug Cameron New South Wales, ALP
Senator Alan Eggleston Western Australia, LP
Senator John Williams New South Wales, NATS
Senator Nick Xenophon South Australia, IND
Mr Tim Bryant, Secretary Mr Colby Hannan, Senior Research Officer Ms Kate Campbell, Administrative Officer
PO Box 6100 Parliament House Canberra ACT 2600 Ph: 02 6277 3540 Fax: 02 6277 5719 E-mail: firstname.lastname@example.org Internet:www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees ?url=economics_ctte/index.htm
TABLE OF CONTENTS
Membership of Committee iii
Abbreviations .................................................................................................... vii
Chapter 1: Introduction and background ........................................................ 1
Referral and conduct of the inquiry ........................................................................ 1
Structure of this report and explanatory note ......................................................... 1
Car fringe benefits .................................................................................................. 2
Recent reform to the tax treatment of car fringe benefits....................................... 3
Chapter 2: Key issues ......................................................................................... 9
Objectives of the reform ......................................................................................... 9
Possible implications once fully implemented ..................................................... 11
Impact of the changes to date ............................................................................... 12
Views on further changes and reviews ................................................................. 14
Committee view .................................................................................................... 15
APPENDIX 1: Submissions received .............................................................. 17
2011 amendments The amendments to the FBTA Act made by part 1 of schedule 5 to the Tax Laws Amendment (2011 Measures No. 5) Act 2011
ABS Australian Bureau of Statistics
AELA Australian Equipment Lessors Association
AEST Australian Eastern Standard Time
AFLA Australian Fleet Lessors Association
AFMA Australasian Fleet Management Association
ATO Australian Taxation Office
FBT Fringe benefits tax
FBTA Act Fringe Benefits Tax Assessment Act 1986
FCAI Federal Chamber of Automotive Industries
GST Goods and services tax
Henry Review Australia's Future Tax System Review
OH&S Occupational health and safety
RACV Royal Automobile Club of Victoria
UK United Kingdom of Great Britain and Northern Ireland
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 Senate1 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'.
1 The provisions of schedule 5 to the bill were examined by the Senate Economics Legislation Committee which recommended that the provisions be passed. Senate Economics Legislation Committee, Reform of the car fringe benefits tax rules: Provisions of Schedule 5 of the Tax Laws Amendment (2011 Measures No. 5) Bill 2011, June 2011.
2 See Journals of the Senate, 2010-11, no. 37 (23 June 2011), p. 1117.
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 Ã B Ã C
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 rate5
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
3 Benefits can be provided by the employer, an associate or by a third party that has an arrangement with the employer. Also, an employee can be a current, future or former employee. See Australian Taxation Office, 'Fringe benefits tax - a guide for employers', www.ato.gov.au/businesses/content.aspx?menuid=0&doc=/content/418.htm&page=4&H4 (accessed 29 October 2012). The full definition is contained in section 136 of the Fringe Benefits Tax Assessment Act 1986.
4 Fringe benefits also impact an employee if they receive fringe benefits that have a total taxable value of more than $2,000 in an FBT year. In these situations, the amount for the corresponding income year (1 July to 30 June) is reported on the employee's payment summary. While this amount does not form part of the employee's taxable income, it is included in certain income tests, including tests for the Medicare levy surcharge, deductions for personal super contributions and a number of tax offsets. Australian Taxation Office, 'Fringe benefits tax - what you need to know', www.ato.gov.au/businesses/content.aspx?menuid=0&doc=/content/ 950.htm&page=15&H15 (accessed 30 October 2012).
5 Grossing-up occurs as income tax is not paid on fringe benefits. After grossing-up, the taxable value of the benefit reflects the amount that would have had to have been paid as salary for the employee to pay for the benefit themselves out of their after-tax salary. Two gross-up rates (2.0647 and 1.8692) are available depending on whether the business or provider are entitled to GST credits for GST paid. The gross-up rates are linked to the rates of GST and FBT (and, therefore, income tax rates). The lower gross-up rate is used if there is no entitlement to GST credits. For more detail about calculating FBT, see www.ato.gov.au/businesses/content. aspx?menuid=0&doc=/content/52006.htm&page=1&H1.
two methods for calculating the taxable value of car fringe benefits—the operating cost method and the statutory formula method:
â¢ 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.
â¢ 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:
â¢ the Senate Standing Committee on Rural and Regional Affairs and Transport's 2007 report Australia's future oil supply and alternative transport fuels;
â¢ 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
â¢ the 2009 final report of the Australia's Future Tax System Review chaired by
Dr Ken Henry AC (also known as the Henry Review).
6 Prior to the 2011 amendments the rates were as follows—less than 15,000km: 26 per cent; 15,000-24,999km: 20 per cent; 25,000-40,000km: 11 per cent; over 40,000km: seven per cent.
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
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).
7 Senate Standing Committee on Rural and Regional Affairs and Transport, Australia's future oil supply and alternative transport fuels, February 2007, p. 162.
8 Senate Standing Committee on Rural and Regional Affairs and Transport, Australia's future oil supply and alternative transport fuels, February 2007, p. 163.
9 Senate Rural and Regional Affairs and Transport References Committee's, Investment of Commonwealth and State funds in public passenger transport infrastructure and services, August 2009, pp. 72, 73.
10 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.
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
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 201112 and are phased in over four FBT years, as indicated by Table 1.1.
11 Australia's Future Tax System Review, Australia's future tax system: Report to the Treasurer, part 2: detailed analysis, vol. 1, December 2009, pp. 47, 49.
12 The amendments were announced on 10 May 2011 as part of the 2011-12 Budget.
Table 1.1: Statutory fractions applicable to valuing car fringe benefits under the statutory formula method
Distance travelled during the FBT year
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.
13 Explanatory memorandum, Tax Laws Amendment (2011 Measures No. 5) Bill 2011, paragraphs 5.11-12, 5.17-18.
14 Explanatory memorandum, Tax Laws Amendment (2011 Measures No. 5) Bill 2011, paragraph 5.22.
15 Explanatory memorandum, Tax Laws Amendment (2011 Measures No. 5) Bill 2011, paragraph 5.24.
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.
16 Australian Government, 2011-12 Budget: Budget paper no. 2, May 2011, p. 23.
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
1 Australia's Future Tax System Review, Australia's future tax system: Report to the Treasurer, part 2: detailed analysis, vol. 1, December 2009, p. 45.
2 Royal Automobile Club of Victoria, Submission 1, p. 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:
â¢ addressing the incentive for more car use;
â¢ achieving consistency in tax outcomes between the statutory formula and the
operating costs method; and
â¢ 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
3 Australian Equipment Lessors Association and the Australian Fleet Lessors Association, Submission 2, p. 1.
4 Australian Equipment Lessors Association and the Australian Fleet Lessors Association, Submission 2, p. 1.
5 Australasian Fleet Management Association, Submission 3, p. 2. The other categories of fringe benefits included expense payments, property, housing benefits, loan fringe benefits, airline transport, debt waivers, meals, car parking, board and residual fringe benefits (i.e. fringe benefits that remain because they do not fit into more specific categories of fringe benefit).
6 Novated leases are a three way agreement between an employer, employee and a vehicle supplier and are usually structured under salary packaging/salary sacrifice arrangements using pre-tax income. Australasian Fleet Management Association, Submission 3, p. 3.
7 Australasian Fleet Management Association, Submission 3, p. 3. According to the AFMA, between 2002 and 2012 novated lease agreements as a percentage of total fleet acquisitions fluctuated from between three to 11 per cent. These figures are from annual surveys of AFMA members undertaken between 2001 and 2012.
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
8 Australasian Fleet Management Association, Submission 3, p. 3.
9 Australasian Fleet Management Association, Submission 3, p. 1. It is not clear what the $2.4 billion figure cited by the AFMA is based on. As noted in chapter 1, Treasury estimates that between 2010-11 and 2014-15 the government will gain $960 million in revenue. Receipts from the entire category of fringe benefit taxes are projected to increase by $1.2 billion over this period; see Australian Government, 2012-13 Budget: Budget paper no. 1, May 2012, pp. 5-29, 5-30. As also noted in chapter 1, the value of the tax expenditure associated with the statutory formula is estimated to decline from around $1.2 billion in 2011-12 to $690 million in 2014-15.
10 Australasian Fleet Management Association, Submission 3, p. 1.
11 RACV, Submission 1, p. 3.
12 RACV, Submission 1, p. 2.
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
13 Australasian Fleet Management Association, Submission 3, pp. 2, 6-7.
14 Australasian Fleet Management Association, Submission 3, p. 7.
15 RACV, Submission 1, p. 2.
16 The RACV noted that, 'as expected' this is higher than the ABS's figure for the community average for the same period of around 14,000km.
17 RACV, Submission 1, p. 2.
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.
18 RACV, Submission 1, p. 3.
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
19 Australasian Fleet Management Association, Submission 3, pp. 4-5.
20 The AFMA argued that there is a disincentive for fleet managers to purchase enhanced safety or environmental features, as they will be subject to FBT (and stamp duty). Submission 3, p. 5.
21 Australasian Fleet Management Association, Submission 3, p. 6.
22 Australian Equipment Lessors Association and the Australian Fleet Lessors Association, Submission 2, p. 2.
impact on sales of new motor vehicles then adjustments to the statutory 20% rate should be made.23
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.
2.22 That in 2015 the Australian government commences a review of the car fringe benefits taxation framework.
Senator David Bushby Chair
23 Federal Chamber of Automotive Industries, Submission 4, p. 1.
APPENDIX 1 Submissions received
Submission Number Submitter
1 Royal Automobile Club of Victoria (RACV)
2 Australian Equipment Lessors Association and the Australian Fleet Lessors Association
3 Australasian Fleet Management Association
4 Federal Chamber of Automotive Industries