How The New Car FBT Rules Actually Work

Proposed changes to FBT rules for cars have provoked considerable discussion, but are those rules really so unfair? Dale Boccabella, associate professor of taxation law at the Australian School of Business at University of New South Wales, explains how the new rules work and argues that the reaction to the changes shows we're far more concerned with self-interest than fairness when it comes to tax.

Car picture from Shutterstock

If we needed another example of just how difficult meaningful and principled tax reform is in Australia, we got it recently in the reaction to the Government's announcement that it would abolish the "statutory formula” method for valuing fringe benefits representing employer-provided cars. The reaction at times was hysterical.

Some of the claims were extreme and they are obviously calculated to put as much pressure on the Government to back down fully, or at least in part. These are the facts in regard to the relevant tax law.

Cost method versus statutory formula method

Where an employer provides a car for the use of an employee, a fringe benefits tax liability might arise. There are two methods of valuing this type of car usage benefit. One is the "cost method” and the other is the "statutory formula” method.

The cost method works out the cost of operating the car for the year (for example, petrol, servicing, insurance). From there, the employer (with the employees help) establishes the percentage of private use (such as a weekend drive to country) and percentage of income producing use (travelling from work premises to clients) of the car by the employee.

This is done on the basis of kilometres travelled on each activity by the employee. This is ascertained by the employee, for the employer, by keeping a log book of income producing trips for 12 weeks in the first year in which the employee had use of the car.

Once the percentage of private use is established, it is applied to the cost of the car to establish the taxable value of the benefit (for instance, the operating cost of $8000 with 40 per cent private use would mean a taxable value of $3200).

Putting aside some transitional rules, the statutory formula method applies a flat 20 per cent to the cost of purchase of the car. (If the car is more than four years old, the cost of the car is reduced to 66.6 per cent of the cost of purchase). Under the statutory formula method, there is no requirement on the employer to establish the percentage of private use of the car by the employee.

That is, the statutory formula is not valuing the car fringe benefit by reference to the employee's private use of the car. For example, if the car has a purchase cost of $32,000, the taxable value of the car benefit is $6400 under the statutory formula method (that is, $32,000 x 20 per cent).

The employer can choose whichever method suits them, including the one that gives the lowest taxable value. It is clear that the statutory formula method, like other presumptive tax mechanisms, is a simplification measure; it means an employer (or employee) can avoid the tax compliance obligations associated with keeping a log book under the cost method.

Generally, the statutory formula method will give a lower taxable value than the cost method when the car has a high percentage of private use, and the cost method will give a lower taxable value when there is a low percentage of private use. One could question the costs that are included in calculating costs (and therefore, taxable value) under the cost method (e.g. deemed interest, deemed depreciation). However, it is only the cost method that accurately ascertains the private use element of the car benefit.

This is what a principled, equitable and efficient income tax system should be taxing. Fringe benefits tax (FBT) is a surrogate income tax on employees who receive benefits for private consumption, but one unfair aspect of the FBT regime is that it taxes all benefits at the top marginal rate of tax applicable to natural persons (currently 46.5 per cent) even though the recipient of the benefit may be on a lower tax rate than 46.5 per cent).

Removing a tax concession

This means that where the statutory formula method gives a lower taxable value than the cost method, the taxpayer is getting a tax concession.

This is recognised in the annual Tax Expenditure Statements issued by Treasury. The Tax Expenditure Statements contain a list of items where taxpayers are getting a tax concession, along with an estimate of the aggregate of the tax concession.

The statutory formula method is listed as a significant tax expenditure. On the other hand, where the statutory formula method gives a higher taxable value than the cost method and the employer fails to elect into the lower cost method (this will rarely happen), the employer is being (unfairly) overtaxed. This would be a negative tax expenditure.

The removal of the statutory formula method simply moves this part of the tax system back to a principled position by removing a tax concession. These facts have been completely lost in the "debate”.

Start date could have been more prospective

In spite of the above, there is a legitimate issue about the start date of the new rules. The removal of the statutory formula method only applies to all new contracts entered into after 16 July 2013, but even then, the statutory formula can be used for the rest of the current FBT year (that is, until 31 March, 2014). After that year, only the cost method will be available.

All existing employee car usage arrangements can continue to use the statutory formula until the car is changed over. In this sense, these new rules are not retrospective. But, many employers and employees would have been in the process of arranging a new car on the announcement date but that arrangement may fall short of having a concluded contract.

In this sense, it is arguable that the Government measure does operate retrospectively for these employers and employees. To deal with the "immediate start date” issue and "retrospective” issue, the Government could have provided for a more generous deferred phase out of the statutory formula method (for instance, until March 2015).

In 2011, when the Government amended the multiple rates under the statutory formula method to move towards one rate (i.e. 20 per cent), which increased the taxable value on most cars, the Government provided a transitional period whereby tax increases were progressively introduced over three years.

Difficulties of bringing about meaningful tax reform

More important to the national interest, does this episode (which may not be over yet) say anything about the prospects for meaningful and principled tax reform? It is certainly not encouraging. It does send the message that those with tax concessions, and the industry serving those tax concession recipients, will not give up their concessions without a fight. It probably does not help where there is a lack of bipartisanship, which is the case with the removal of the statutory formula as the Coalition have indicated they will oppose this measure.

Similar to many areas of human conduct, the longer tax concessions remain in place as part of the tax system, the higher the level of normality that is achieved. Normality and entrenchment can reach the point where users of the tax concession start believing that the concession is a normal part of a benchmark tax system.

Some of those complaining about the removal of the statutory formula method may genuinely believe that the government is imposing a tax increase on them over and above what a benchmark income tax would impose, rather than seeing the government's announcement as the removal of a tax concession.

Many complainants though will be moved by pure self-interest and these people know full well they have been accessing a tax concession. Sadly, our tax system is riddled with many significant tax concessions that depart from a benchmark tax system -- such as the 50 per cent tax concession on capital gains of natural persons, 100 per cent exemption on all the gain made on the family home, generous tax concessions on superannuation, failure to tax all land under state land tax regimes.

Some not-so-apparent concessions involve negative gearing, or the current generous treatment of discretionary trusts and the lack of death duties. The longer tax concessions remain in our tax system, the more normality they will achieve. In turn, the harder it will be for future politicians to remove or scale back the concessions.

In a future where Australians demand more services from Government and at the same time resist higher taxes, scaling back tax concessions may be the least displeasing option to meet desired revenue needs. One heartening thing for future governments is that there are still many tax concessions worth a lot of lost revenue that could be wound back.

Dale Boccabella does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

The ConversationThis article was originally published at The Conversation. Read the original article.


    My issue with this is not that it was done, but more so how it was done. My sister along with many others at NLC just got made redundant as the business literally woke up on the 16th and halted business thanks to these laws.

    I get that it's not an extra tax but help these companies transition before they loose a heap of customers which were previously just rorting the system.

      It's certainly going to be a big "heads-up" to any company whose business model is grounded in getting their clients a tax break. The government (including whoever it is after the next election) are going to be clamping down on all these types of rorts.

        they are not rorts!
        They are government provided tax breaks or incentives...
        no one is ripping off anyone, it is the Government allowing this

          It is probably not fair to call them rorts, because they were not actually illegal. The same goes for some tax-avoidance uses of negative gearing, family trusts, etc.
          That said, there is a large gap between something being legal and something being ethical. The size of the gap to be closed suggests that there were a lot of company cars with very little work-related use. If the purpose of the statutory method was to provide a shortcut to calculate the taxable value of a car intended for use primarily for company purposes, then although it may be legal it doesn't mean it is ethical.
          That aside, I have sympathy for the employees of companies affected by this change. I have less (but still some) sympathy for the operators of the companies. I would likewise have some little sympathy for tax accountants who specialised in handling family trusts if the tax implications of family trusts were revised and so they suddenly had little work.

            I hardly find doing something that an employer and the ATO allow you to do - well within the letter of the law - unethical.

              And that's the problem right there.

                Care to elaborate on this mystical "problem"?

                I would love to hear how doing something that is perfectly legal can possibly be construed as unethical.

                  Sure. I'll briefly step outside of tax law to provide an example of legal but unethical.
                  Let's imagine there is a guy who is married to a woman, but doesn't really want to be married to her any more. He's a sadistic and vengeful sod and feels wronged because he is a douche. He also happens to be madly attractive, why not. So he sleeps with a bunch of his partner's friends and videotapes them. He then gets his partner pregnant, convinces her they can't afford it, convinces her to have an abortion despite her reservations, then runs with some other woman leaving a DVD of him banging her friends on the kitchen bench for her to find when she gets home.

                  I think most people would consider this to be ethically dubious, but it is not illegal. There are any number of things that are unethical but not legal.
                  (A potential counter-argument is that the description above is immoral, not unethical. Should that be the case, and a definition of ethics vs moral be provided I imagine I can produce an example to fit).

                  The law is not a code of ethics. It is not unrelated to ethics, but the most you could say for it with relation to ethics is that it provides a framework for addressing the most egregious violations of what people would consider ethical - the absolute bottom line - along with a bunch of things unrelated to ethics.

                  The not-so-mystical problem is that a common view is that it is a good thing to bend lifestyle and other decisions to absolutely minimise the amount of tax paid. On a large-company scale, organisations like Google and Apple have offices in tax havens and that's where the money flows to avoid tax. On a individual scale, we have people with 'company cars' which have negligible actual company use, a substantial part of internet connections claimed as a work expense when they are barely if ever used for work, family trusts constructed purely to avoid tax, and so on.

                  Some of these examples (e.g. claiming a fair bit of a home internet connection when it is not really used for work) are probably illegal but essentially unenforceable. However, I imagine everyone knows someone who engages in some of these activities, and it is somehow considered appropriate by a decent chunk of the population.
                  That last bit: it is considered acceptable. That is the mystical problem. Roads, schools, hospitals, etc get paid from that fund yet loophole-hunting and 'tax minimisation' is somehow fine.

          When they're done for a positive effect on the economy for a limited period they're incentives. When they are left in place with no real change for far too long to the point that people come to expect and rely on them, they are rorts.

          I think this is a pretty good deal really. A few hundred direct jobs lost in easily re-skilled industries for $2.8 billion (?) extra tax revenue is pretty good. I mean just by cutting the $750 million in subsidies to the auto manufacturers would probably cost many thousand jobs from people that could probably not be re-skilled. I currently benefit from this FBT 'incentive' for a few thousand a year. I can't honestly say that all of that money I will be getting back is 100% work expenses. I will take because I can, and see it as a little bonus, that money won't make or break me financially, and if it did I'd be having a long, hard look at how my time is charged out. i have no sympathy for Car stealerships that may shed a few jobs because of these new laws either.

          OK that was unfair. But many tax breaks are pushed right to the boundaries of the intention of the law, and there are plenty of enterprising businesses ready to take advantage of any kind of government incentive.

      I feel bad for your sister/family, you are right though.
      This decision Rudd made without thinking about the consequences at all.

      They are not law, but peoples decisions are being changed/made by what may happen from this announcement. Sad state of affairs

        Was he supposed to make an announcement, announcing the forth coming announcement to announce the changes before making them law?

          No but a little bit of discussions with industry would not hurt.
          Did they even realise what their announcement would cause? Such as job losses.

            That is what happens when you work for a business that is practically based on exploiting the tax system or any other government policy. The policy/code changes and your business must adapt accordingly.

              No one is exploiting anyone! That was the purpose!

              Just 2-3 years ago Bill shorten (then Assistant Treasurer) said this new FBT system was fantastic for families and industry when Labor brought it in! They introduced it, they consulted and it worked great, created jobs, helped the industry.

              Now fast forward 2-3 years, they decide overnight, without consultation that it is bad, it is a loop hole that needs closing - that is utter bullshit, it is not a loophole, it is a system they created for that purpose and it worked great!

              Rudd and team use the term loophole or people throw around rort to make it sound like people were wrongly getting things for free, to make it an emotional thing so we pick sides.

              The only side I can pick is the side of the people who have lost jobs because this Government has failed to do their homework. Rudd has made another rash decision because he needs to a plug a huge hole in budget that he created and is trying to make it like he is a hero to save the country when in fact he is doing what he has always done - making decisions on a whim to grab headlines, without thinking of the consequences of those decisions!

              Such an arrogant and selfish man...

              *rant out*

              ps. Yes I agree with you, decisions do need to be made and changes to law occur and those change and cause jobs to come and also go. However it is the speed and lack of discussion that this has caused the worst effect. It is the uncertainty of Government and its decisions that is also worst. Businesses and people set up and invest because of Policy and law, if Government keeps chopping and changing law and Policy to suit their own needs or their budget shortfall - this erodes confidence in the system and prevents investment in industries.

                Maybe exploiting wasn't the best choice of words.

                I think one of the most important things I get out of your comment is that such tax laws need to be created with sunset clauses, so they need to be explicitly renewed or they simply expire.

    Definitely needed to be done, going to take a hit on mid to high end car sales though, everyone I know with a decent car (ie, one they couldn't usually afford) only bought it due to tax breaks.

    How about phasing out negative gearing next?

    Last edited 23/07/13 12:32 pm

      its hard enough for my generation to afford a home. Removing that will just create another barrier of entry

        Really? Removing negative gearing, which provides tax breaks for people with investment properties renting them out, will make home ownership more expensive? I don't follow.


          because it allows us to have an investment property along with our shitehouse residential unit at the same time

          so our equity can grow faster and we can finally own a decent home quicker.

          The idea that we should finally own our home when we're 50 is absurd

          Just because im smart enough about my money and investments, doesnt make life still hard for us. Negative gearing is losing money, so that eats into our savings for expenses

          Last edited 25/07/13 10:48 am

            Not to be more rude than is necessary but that is a really profoundly stupid answer. You could just as readily argue that you should just be given handfuls of cash by the government because you can't afford a house. It would certainly improve home affordability, right?

              you work with what is available
              not saying its the right or best way.

              but given that negative gearing isnt going anywhere anytime soon (i hope). If you cant beat them. Join them

              Also, if they suddenly got rid of it. I suspect there would be a near sudden crash in the housing market with gen x selling off their investment properties that are now losing them money with no tax benefits. This would have a chain effect throughout the economy

              so affordability increases, but economy and jobs and wages suffer.

              unless they place a caveat saying that any existing properties can take adantage of it, but anything bought after a certain date cant.

                If negative gearing was removed and that made investment properties less beneficial for investors, then the value of houses would drop which would be a godsend non-investment buyers. Those who had already purchased homes would unfortunately lose value on their houses, but that is always a risk with house purchases.

                I'm not sure how you think that would have negative reverberations through the economy. Some people would lose (i.e. those with investment properties who are negative gearing) and some would win (those who want to purchase a property).

                What you said is true in the sense that any middle-upper-class welfare (and let's not pretend negative gearing is not that, because it clearly is: it is only available to those who already have a reasonable income and so can purchase an investment property) makes purchasing a home more achievable for those in that class, in the same way that any other middle-upper-class welfare would do so. It is a poor implement for managing home affordability, though, because it is not targeted. In fact, it is targeted such that investment properties are artificially cheap to have which is more likely to inflate house prices than directly make them more affordable.
                i.e. Yes, if you happen to be in a class able to leverage negative gearing, then the effective extra investment return makes buying a house easier in the same way any other subsidised investment would , but it is not a good instrument in the specific goal is the improve home affordability.

                Kill negative gearing, I say, and let the market adjust to truer values without subsidies for investment buyers.

                  i dont disagree with you mostly. in fact i share you sentiments
                  im just saying its unlikely to be done. So the way i deal with it, is just to go with it

                  also, Those who had already purchased homes would unfortunately lose value on their houses, but that is always a risk with house purchases.
                  is an understatement

                  its like saying, the FBT change will mean people will unfortuantely lose their jobs, but that is always a risk with any form of employment.
                  It doesnt change the fact that this is a serious implication on the person

                  You need to remember that when housing values fall, the non investment, owner occupied house values will also fall.
                  Then you could potentially have the effect that the US experienced with their housing market during GFC. Tons of homes lost because the value of the equity in the property no longer matched with their loan.

                  Sure it may be great in the long run (essentially resetting housing prices). but it will hurt alot of people in the short to medium term.
                  Additionally, alot of super funds have money invested in property

                  That means everyone, including yourself potentially, stand to lose alot of money for your retirement.

                  So who would vote for that?

                  A better approach over "resetting" property values, is just to curb the growth. So a gradual phased approach would be better

                  e.g. reduce the tax benefits by 50%. Then after a while, remove it entirely for new investments (but not existing investments)

                  that will give it a soft landing and be more acceptable

        Removing negative gearing removes the baby boomer ability to own 5 houses that are losing them money and driving up the price. It would bring house prices down as any normal person would only be able to own one or two, and people would have to carefully chose investments that are positively geared. Chances of it happening are pretty slim though since a large portion of middle aged people in this country have used negative geared property as their retirement fund.

          so our generation would have to sacrifice having a future nest egg or retirement investment just to do so? wouldnt a better solution be to tax more heavily on people with more than 1 property

            I don't know about you, but I'd much rather be able to afford property to live in than not be able to afford property and scam tax breaks to use it as an investment.

              also rent rates will increase if negative gearing is removed because the investors would have to subsidise the loss in tax breaks by increasing the rent they charge to pay the interest

              and i dont understand your logic to suggest im "scamming" anything. Am i doing anything nefarious or illegal? Its something the tax law allows us to do. So how is it a scam?

              get off your high horse. Just because you arent doing it doesnt mean we cant

                I really don't understand why you think negative gearing helps you "afford to buy". It wouldn't be as unaffordable in the first place.

                  well it requires you borrowing money from family or go in with your partner

                  but once you have enough capacity to borrow, you use negative gearing as an investment or tax scheme

                  then mid to long term, cash out or use the equity to finally buy a home

                  just a way to accelerate your money really

    Seems to be picking the low hanging fruit. They should have attacked negative gearing first (or at least at the same time). But instead they went for "easy" option, fill the coffers off the back of only a few thousand redundant people.

    Slightly off-topic, but I'm also surprised that the broader context of this hasn't been considered - the changes were made as a result of scrapping the so-called Carbon Tax and moving to an ETS a year earlier, and the revenue impact of doing that due to the lower cost of permits from the European market.

    The effect of this change to the car FBT rules also results in the possibility of taking more cars off the road, and reduces the number of unneccessary trips taken purely for the sake of achieving the highest level of FBT concession - all in line with the broader mandate of "the environment".

      why would you name yourself Caesar? its so pretentious

        Thanks for taking the effort to post that here on Lifehacker, while hiding behind a nick, in a discussion about FBT. Did you have something relevant to say about my comments in regards to the environmental aspects of the changes to the FBT rules?

        Actually - unlike many of my Asian compatriots with fanciful names - my parents named me (yes, I choose to use my real name instead of a handle 'coz that's just how I roll). Also, a guy with "Dong" in his own name should probably use a little more discretion when criticising others.

        Last edited 25/07/13 3:35 pm

          lol someone is butthurt

          Thanks for clarifying that your parents are pretentious and have poor taste then.
          Glad it wasnt your own decision and sux to be in that situation. But regardless of whether you chose it or not. Still pretentious.

          And nice work making bold assumptions that because i dont flaunt my name around as easily as you do, it means I am trying to hide or am ashamed of my real name. Because i am so ashamed of it that I clearly havent submitted any user content that was published under my real name before.

          Actually - Unlike many of my asian compatriots who have fanciful names, I am not ashamed and have stuck with the original. I find that having a semi porn star name makes it easier to break into the industry. Nevertheless, nice work making a passive aggresive racist remark telling me to be self concious about my own name. Great work promoting diversity and acceptance for our kind.

          But before you trip and fall off your high horse, take a minute to consider that its just easier and quicker to type in and login with a short username, like you know...most people on the internet

          Last edited 26/07/13 9:31 am

            I'm guessing that a mod will be along shortly to delete all this because clearly your need to highlight how pretentious my name is far outweighs the importance of the subject at hand, but for the record, if you look carefully, you will notice that I do log in with a short username.

            Last edited 26/07/13 11:17 am

    Remove negative gearing, yeah cool, how much do you want your rent to go up?

      (deleted because of dupeness)

      Last edited 29/07/13 10:09 pm

      Good question. Unfortunately, the answer is that it doesn't actually seem connected.
      Or to excerpt a large chunk:

      Supporters of negative gearing argue that its abolition would lead to a ''landlords' strike'', driving up rents and exacerbating the existing shortage of affordable rental housing. They point to ''what happened'' when the Hawke government abolished negative gearing (only for property investment) in 1986, claiming it led to a surge in rents, which prompted the reintroduction of negative gearing in 1988.
      This assertion has attained the status of urban myth. However, it is not true. If the abolition of negative gearing had led to a landlords' strike, as proponents of negative gearing usually assert, then rents should have risen everywhere (since negative gearing had been available everywhere). In fact, rents (as measured in the consumer price index) actually only rose rapidly (at double-digit rates) in Sydney and Perth. And that was because in those two cities rental vacancy rates were unusually low (in Sydney's case, barely above 1 per cent) before negative gearing was abolished. In other capitals (where vacancy rates were higher), growth in rentals was either unchanged or, in Melbourne, actually slowed.
      Notwithstanding this history, suppose that a large number of landlords were to respond to the abolition of negative gearing by selling their properties. That would push down the prices of investment properties, making them more affordable to would-be home buyers, allowing more of them to become home owners, and thereby reducing demand for rental properties in almost exactly the same proportion as the reduction in the supply of them.

    The writer states we get way with a lot of concessions such as no tax on profits if you sell your house or even death duties,so this adjustments on fbt don't seem so bad.
    However the writer also fails to mention Australia is one of the most taxed nations in the world, I could go through a large list and i don't even include speed cameras which is essentially another tax which never goes towards road safety or better roads.
    So why not take advantage or even demand for some tax concessions, reality is not everyone will take advantage of these concessions and some can't afford it or don't use it.
    In my view using tax concessions on such a high taxed nation at least promotes productivity, the person who buys the car keeps the manufacturer in business and has a chain effect on connected industries such finance companies and manufacturers such as Toyota,Holden and ford who rely heavily on fleet and government departments to buy their cars.

    Mr Rudd should concentrate on creating jobs and reducing cost of living instead he increased the cost of living since 2007 with either ets or carbon tax and loss of jobs.
    Maybe I'm a minority I don't don't know but I came from a country which economically is pretty much destroyed due to bad decisions and policies from politicians and I can see my new country which I have made my home going down the same path... But people who haven't seen or been through it won't know until it hits them.

    Of course the people that drive are going to complain about taxes going up! Nobody wants to add more figures to their car financing costs! But at the end of the day, I guess in overview, the government has to do something to make sure that our roads don't get overcrowded right?

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