Fringe benefits tax reform of the car fringe benefits rules


Budget Review 2011-12 Index

Budget 2011–12: Fringe benefits tax—reform of the car fringe benefits rules

Bernard Pulle

The Budget Measures: Budget Paper No.2: 2011-12 states that the Australian ‘Government will reform the current “statutory formula” method for determining the taxable value of car fringe benefits’ for fringe benefits tax (FBT) purposes.[1] The Treasurer and the Assistant Treasurer in their Joint Media Release on 10 May 2011 indicated the taxation and environmental objectives of this reform measure:

The Gillard Government will change the fringe benefit treatment of cars to remove the unintended incentive for people to drive their vehicle further than they need to, in order to obtain a larger tax concession.

Phasing out the current car fringe benefit treatment is a sensible reform from both taxation and an environmental perspective, and implements another recommendation of the Australia's Future Tax System Review.[2]

Brief background

The final report of the Australia’s Future Tax System review (known as the Henry review) had recommended that the statutory formula for working out the taxable value of car fringe benefits should be reformed and the Australian Government has accepted this recommendation. The proposed reform in the Henry report was to provide a single statutory rate that would apply to the original cost of the car regardless of the distance travelled. In Recommendation 9(b) it recommended that the current formula for valuing fringe benefits should be replaced with a single statutory rate of 20 percent regardless of the kilometres travelled.[3]

The Ralph Review of Business Taxation in its 1999 report A Tax System Redesigned recommended a schedule approach to replace the statutory formula.[4] The schedule was to be based on a survey by motoring organisations of aggregate running costs of vehicles, both fixed and variable. In recommendation 5.4 it suggested that a 45 per cent business use be deducted from this schedule of running costs to determine the taxable value of an employee’s car benefit.  If an employer or employee wished to specify a percentage higher than 45 per cent for business usage, the obligation should be on the employer or employee who makes the claim to substantiate it.

What is the statutory formula method for working out car fringe benefits?

There are currently two methods of working out car fringe benefits. These are described as the statutory formula method (SFM) or the operating cost method. Under the operating cost method, the taxable value of the car fringe benefit is a percentage of the total cost of operating the car during the FBT year. This percentage is based upon actual business/private usage of a car supported by the maintenance of a car logbook.

The SFM uses a statutory formula to estimate the annual taxable fringe benefit of the vehicle based on a percentage of the original purchase cost. This statutory percentage is determined by the total kilometres travelled by the vehicle in the FBT year. The higher the kilometres travelled the smaller the percentage is, as shown in the table below. The SFM therefore provides scope for an employee to lower their FBT liability by increasing the kilometres travelled and thereby reducing the applicable statutory percentage.

Total kilometres travelled during the FBT year

Statutory percentage

Less than 15,000km

26

15,000 to 24,999km

20

25,0000 to 40,000km

11

More than 40,000 km

7

Source:  Calculating the taxable value of a car fringe benefit using the statutory formula method[5]

Proposed Reform

Under the proposed reform, the Government will replace the current statutory percentages with a single rate of 20 per cent that applies regardless of the distance travelled. Thus the incentive under the current rules to increase the distance travelled in any FBT year to reduce the statutory percentage and the FBT liability will be removed.

This reform will apply to new contracts entered into after 7:30 pm (AEST) on 10 May 2011, and will be phased in over four years. This measure will result in a gain to revenue of $970 million over the forward estimates and is expected to increase GST revenue by $50 million over the same period.



[1].       The budget figures in this brief have been taken from the following document unless otherwise sourced: Australian Government, Budget measures: budget paper no. 2: 2011–12, Commonwealth of Australia, Canberra, 2011, p. 23, viewed 16 May 2011, http://www.aph.gov.au/budget/2011-12/content/download/bp2.pdf

[2].       W Swan (Treasurer) and B Shorten (Assistant Treasurer and Minister for Financial Services and Superannuation), Reform to car fringe benefit rules, media release, no. 050, Canberra, 10 May 2011, viewed 16 May 2011, http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/
2011/050.htm&pageID=003&min=wms&Year=&DocType=0

[3].       K Henry (Chair), J Harmer, J Piggott, H Ridout and G Smith, ‘Part two: detailed analysis’, Australia’s future tax system: report to the Treasurer, vol. 1, Commonwealth of Australia, December 2009, pp. 47–49, viewed 17 May 2011, http://taxreview.treasury.gov.au/content/downloads/final_report_part_2/
AFTS_Final_Report_Part_2_Vol_1_Consolidated.pdf

[4].       J Ralph, A tax system redesigned, Review of Business Taxation, July 1999, viewed 17 May 2011, http://www.rbt.treasury.gov.au/

[5].       Australian Taxation Office (ATO), ‘Fringe benefits tax for small business’, ATO website, viewed 18 May 2011, http://www.ato.gov.au/businesses/content.aspx?menuid=0&doc=/content/33353.htm&page=20&H20


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