En Passant

Fringe benefits are non-cash benefits an employer provides to an employee as part of their remuneration. According to the Australian Tax Office ‘a fringe benefit may be provided when an employer:

• allows an employee to use a work car for private purposes
• gives an employee a cheap loan
• pays an employee’s gym membership
• provides entertainment by the way of free tickets to concerts
• reimburses an expense incurred by an employee, such as school fees
• gives benefits under a salary sacrifice arrangement with an employee.’

In 1986 the Hawke Labor Government changed the way fringe benefits were taxed. Prior to that an employee included the value to them of the fringe benefit in their tax return. Of course the value to me of garaging a company car, keeping it clean and running OK, making sure it was serviced regularly all outweighed the private use I made of the car. So many taxpayers would not declare any amount for the fringe benefits they received, or declared amounts much lower than you would expect.

On top of that the ATO just didn’t have enough staff to police the fringe benefits taxing provision applying to employees. So a whole industry sprang up around remuneration packaging. The temptation was obvious.

An employer would reduce the salary paid to their employee and give them effectively tax free fringe benefits. Employer and employee, depending on the balance of power, would split the income tax saved between them.

With the Fringe Benefits Tax Assessment Act in 1986 the Hawke Government changed the rules. It made the employer liable to pay fringe benefits tax (FBT) since there were fewer of them (so they were easier to audit) and because they were benefiting from the abuse of employee fringe benefit arrangements.  Of course employers would adjust the salary package to take account of the new tax imposed on them.

The new law specified various types of fringe benefits and set in place objective but still often generous rules for valuing them.  That generosity in valuation meant it was and still is attractive in many cases to receive some of your remuneration if you can as a fringe benefit.

Take cars. For cars there were 2 ways a car fringe benefit could be valued.  One is known as the statutory formula method. This applies a percentage to the value of the car. Prior to 2011 that percentage varied depending on the kilometres traveled.  The more kilometres traveled the less the percentage was and hence the lower the value of the amount determined as the value of the fringe benefit. The more you traveled the less tax your boss paid. This explained why just prior to the end of the FBT tax year on 31 March many employees would drive long distances to holiday destinations.

In 2011, at the urging of the Greens and their concerns about the statutory formula encouraging unneccesary and polluting car travel and in response to the Henry Tax Review, the Government standardised the formula at 20%.  Here is an example from the Explanatory Memorandum introducing the Bill (remembering the FBT tax rate is $46.5%):

Tamara leases a car under a novated lease arrangement with her employer on 1 April 2020.  The lease is a three-year lease. The base value of the car is $40,000.  During the first FBT year, the car is driven 23,000 kms.  The next year, it is driven 40,000 kms, and in the final year the car is driven 37,000 kms.  The car is available to Tamara from 1 April 2020, and is available for the whole tax year.  The car is solely for private use.

Under the statutory formula method, assuming no employee contribution, the FBT taxable value would be:

for the 2020-21 FBT year:  =  0.20  ×  $40,000  = $8,000

for the 2021-22 FBT year:  =  0.20  ×  $40,000  =  $8,000

for the 2022-23 FBT year:  =  0.20  ×  $40,000  =  $8,000

Each year, the FBT payable would be $8,000  ×  0.465  (the FBT rate) ×  2.0647  (the FBT GST-inclusive gross-up rate)  =  $7,681.

That $7681 is then taxable in the hands of the employer at the rate of 46.5%.

[For the technically minded the  gross-up just recognises that what you want to tax is the equivalent of the salary that would have been paid and the gross up formulae, including taking account of GST if credits have been or will be claimed, do that. ]

The alternative method is known as the operating cost method. Basically what you do is keep records (log books) of your travel for a typical 3 month period – the kilometres traveled and the purposes (business or non-business). This is then used to work out your personal use percentage for that year and the next 4 years.

Let’s say using the log book method you work out your private use is 30%. The total operating costs for the year were say $10,000. So the FBT amount is $3000, which is then grossed up by the appropriate FBT inclusive rate and then subject to tax at the rate of 46.5% which the employer pays but factors in to your overall remuneration package. In other words employers pay the tax but employees bear the cost.

Until recently, the statutory method applied unless a taxpayer chose to apply the operating cost method. That all changed recently when the government announced as part of its move from a fixed price for permits in CO2 emissions to a floating price a year earlier from 1 July 2014 that to help pay for the loss of revenue it would remove the statutory method as an option for valuing car fringe benefits.

For car fringe benefits provided after the announcement the only method available (assuming Labor win the forthcoming election and can get the backdated changes through the Senate) will be the operating cost method.

A couple of points come to mind. The statutory method was too generous to taxpayers. It typically understated the amount of  private use. According to the Treasury Tax Expenditures Statement 2012 the revenue foregone as a consequence was in the order of $930 million last income year and will be $780 million this income year.

Revenue foregone is not the same as revenue collected. The Government estimates that the prospective change will improve the Budget bottom line by $1.8 billion over four years, or on average $450 million a year.

The Treasurer has said that ‘it is estimated that around 320,000 people are currently salary sacrificing a car under FBT rules.’ That figure is not that enlightening. Some would be under the operating cost method rather than the statutory method but are still under FBT car rules. Some too would be under novated leases rather than salary sacrificing.

The ATO Statistics estimate that in 2010/11 and 201/12 there were about 530,000 car fringe benefits for which the taxable value was calculated using the statutory formula. (See Table 8.7 page 92).

The 530,000 were producing revenue foregone under the statutory method this year of $780 million, an average of about $1400 in tax foregone or about the equivalent of $3000 in salary pre-tax. In other words the changes will translate, based on these back of the envelope calculations, as a loss in real terms for employees on average of almost $3000 a year.

In the same press release and in response to Opposition scare mongering, the Treasurer that around two-thirds of those impacted by the change earn more than $100,000.

While that figure may or may not be true, $100,000 is only 33 percent higher than the average wage and includes a lot of middle managers. Second, what about the one third earning below $100,000 who will lose money because of the change?

For example FBT arrangements are rife in the not-for-profit (NFP) sector. This is because not-for-profit employers are, depending on the circumstances, exempt from FBT on an employee’s fringe benefits where that employee’s total grossed up value is less than $17,000 or in some cases less than $30,000.

This reliance on salary packaging is a consequence not just of the exemption but also because of the low pay many many workers (e.g. Social and Community Service or SACS workers) in the not-for-profit sector receive.

Many workers in the NFP sector are on salary packages to take advantage of the FBT concessions and so hope to address to some extent the low pay and the gender pay gap. It is inadequate but it is better than nothing. One of my former students said to me that without the $17,000 worth of fringe benefits she couldn’t survive. Her salary was around $45,000.

Abolishing the statutory formula method means that NFP employers will have to move to the operating cost method for car fringe benefits contracted after 17 July and that will increase the grossed up value of the car fringe benefit and push some prospective car FB recipients in the NFP sector over the tax free threshold for them be that $17,000 or $30,000.

The tax bill of the NFP will increase and it will then of course recoup the cost in some way from the NFP workers. Given that salary sacrificing for NFP emloyees is widespread as a way of compensating for very low wages,  many low paid NFP workers will have their real after tax wage cut by the Rudd Labor government’s proposed abolition of the statutory method.

Apart from somehow changing the proposed abolition of the statutory method FBT rules to retain the benefit for low paid workers, including NFP workers, another option is to pay low paid workers much more. That will require militant industrial campaigns.

The SACS pay increases for example are over 7 years and a significant amount of the real equal pay increases will be eaten away by inadequate minimum pay increases and enterprise agreement negotiations by powerful bosses and a lack of adequate government funding. Powerful bosses and government under-funding are two important reasons why SACS workers are underpaid and only building strong militant unions through militant action is going to change that.

If you listen to the henny-pennies the changes will destroy the Australian car market. This is incorrect. The global car market is destroying the Australian car industry.  The FBT statutory formula method was an indirect grant to the Australian car industry but since more than 80% of purchased cars are imported most of the disguised grant is going to overseas companies.

If the Australian industry can only survive because of the FBT concessions then it doesn’t have much of a future.

The Opposition and business have been arguing that the Government should have discussed such a major change with stakeholders. (Stakeholders is management lingo for the powerful, usually bosses.)

As a general rule this is a good precedent. I think the Australian government should negotiate with countries before we invade them, negotiate with single mums before they cut the single parent payment, negotiate with  unions before they cut public service jobs, negotiate with asylum seekers before they change the rules, talk to nurses’ unions, teachers’ unions etc etc. You get the idea.

What the bosses mean is they want government to negotiate with them before they have to take their snouts out of the trough of government largess. Why? Because they are the bosses and they control society.

The lie that the bosses  produce the wealth is re-produced in calls to negotiate with the bosses over tax changes. Me? Soak the rich till their pips squeak. No discussion – make them pay for better public health, education, transport and real measures to address climate change.

If the Government were serious about jobs and climate change it would take over the car plants and organise the production of buses for free public transport, trains and tracks to build a free public transport network across Australia and inter-city goods transport, building solar plants, wind farms and so on.