Changes to FBT hit both employers and employees
Tuesday, 10 May 2011: The Federal Treasurer tonight confirmed widely speculated changes to the FBT legislation as it impacts the provision of cars by employers to employees. To be phased in over a four year period, the distance travelled in a car will no longer impact the amount of FBT payable on car fringe benefits.
From 1 April 2014, under the statutory formula valuation method, the FBT on all car fringe benefits will be calculated as 20% of the base value of the car. It was confirmed that the operating cost valuation method will remain unaffected. The changes will be phased in progressively on contracts entered into after 7.30pm on 10 May 2011.
Elizma Bolt, Deloitte Employment Taxes partner, said “The change will have an impact on both employers providing cars to their staff and also employees that salary package motor vehicles.
Employers will bear an additional FBT cost as all cars will be valued at 20% of their base value whereas prior to the proposed changes vehicles used to drive in excess of 40,000km by say, sales representatives were only taxed at 7% of their base value.”
Ms Bolt anticipates that more employers will consider applying the operating cost valuation method to reduce this tax burden. However, this method involves more administration as detailed records of all operating costs of the vehicles need to be maintained and employees will need to maintain a logbook for a continuous 12 week period.
However, anticipated revenue from the proposed measures might in fact be less than expected by the Government, Ms Bolt said. For example, in the past a vehicle used extensively for business purposes, travelling more than 40,000km per year was valued under the statutory formula at 7% of the base value. If the employer now applies the operating cost valuation method rather than accepting that the FBT is payable at 20% of the base value, a much lesser amount of FBT might in fact be collected by the Government.
According to Ms Bolt, “Salary packaging of motor vehicles will need to be carefully considered by employees to ensure that it remains tax efficient. Employees that drive less than 15,000km might now, at the standard 20% statutory bracket rather than at 26%, benefit from salary packaging rather than purchasing a motor vehicle from after tax dollars.
On the other hand, employees that drive longer distances will definitely be negatively impacted.”
Ms Bolt cited the example of an employee earning $80,000 with a $35,000 car travelling more than 40,000km per year now being approximately $2,900 per year worse off. That is a difference of more than $50 per week out of pocket.”
Ms Bolt commented that, from 2014, the changes will make it easier for salary packaging administration purposes as employees and employers will know up front what the FBT liability for the year will be, as it will no longer be impacted at the end of the year if actual mileage is lower or higher than first anticipated when the salary package was set up.
Ms Bolt agrees that the Government has achieved their intended “green” effect with these changes; the FBT liability on cars will no longer be reduced by an employee driving longer distances.
Ms Bolt also noted that the ATO has significantly increased their FBT audit activity. With the changes to the valuation of the benefits which generates the largest portion of FBT revenue, employers should expect even greater scrutiny of their car FBT processes and valuations, Bolt said.