Appendix 4
Car fringe benefits tax: Questions to Treasury and Treasury's answers
The committee's questions:
QUESTIONS TO TREASURY - CAR FRINGE BENEFITS TAX
Concerning tax expenditure D24 relating to the
concessionary taxation of car fringe benefits by the statutory formula method
(2008 Tax Expenditures Statement, p163):
-
How are the tax expenditure amounts estimated and what are the input
data used? Please give details of the data used relating to the years shown in
the 2008 Tax Expenditures Statement.
-
What is the reliability of the estimate for past years?
-
What is the reliability of the estimate for future years?
-
How are the amounts of actual private and work-related use by the
affected cars estimated?
-
Is taxation of cars by the operating costs method concessionary (as
could be the case for example if the statutory depreciation and interest rates
were out of step with true depreciation and interest rates)? If so, what is
Treasury's estimate of the tax expenditure, and is it included in the D24 reported
figures?
-
Does the reported tax expenditure include exempt car fringe benefits? If
not, what is Treasury's estimate of the tax expenditure associated with exempt
car fringe benefits?
-
For each of the last ten years, please give:
-
FBT paid relating to car benefits calculated by the
statutory formula method; the number of employers involved; the number of cars
involved;
-
FBT paid relating to car benefits calculated by the
operating costs method; the number of employers involved; the number of cars involved.
-
What is the government's knowledge of the income distribution of the
beneficiaries of the tax expenditure (ie the affected employees, assuming
employers pass the benefit through)? For example, what proportion of the
beneficiaries have income at a level that incurs the top marginal rate?
-
At the time FBT was established, what was the policy purpose of making
FBT of cars concessionary? Please give references to any written government
policy or statement of the time supporting this.**
-
At
present, what is the policy purpose of making FBT of cars concessionary?**
-
What
is the present purpose of setting the statutory formula thresholds and
percentages at the chosen numbers? If there is an assumption that the
percentages reflect average amounts of work-related and private use by cars in
the various kilometrage categories, what research or data supports this?
-
What
is the government's knowledge of the extent to which the concessionary aspect
of car FBT, and/or the construction of the statutory formula, encourages use of
cars which would not otherwise occur?**
-
Is
there any practical or administrative impediment to changing the details of the
statutory formula (for example, the number of kilometrage categories, or the
statutory percentages), if the Government should wish to do so?
-
Has Treasury done any modelling of the likely cost to revenue of these scenarios:
-
make employer-provided public transport fares to
and from work an exempt benefit;
-
make employer-provided public transport fares
generally a benefit taxed concessionally to the same degree that car benefits
by the statutory formula method are taxed concessionally.
If so, what were the results?
**
Note that whether the tax should be concessionary, and whether there should be
a statutory formula method for the sake of easy compliance, are separate
questions, since a statutory formula method could be maintained, but the
concessionary aspect reduced, by adjusting the details of the statutory
formula: see this committee's report on Australia's Future Oil Supply and
Alternative Transport Fuels (2007), paragraphs 8.88 & 8.95, at https://www.aph.gov.au/senate/committee/rrat_ctte/completed_inquiries/2004-07/oil_supply/index.htm
Concerning fringe benefits
taxation of vehicles other than cars:
-
For
each of the last ten years, please give:
-
Does Treasury
believe that FBT of vehicles other than cars is concessionary? Why/ why not? If
so, what is the estimated value of the tax expenditure? Does this include
exempt benefits?
25 June 2009
Treasury's Answers:
Concerning tax expenditure D24 relating to the concessionary
taxation of car fringe benefits by the statutory formula method (2008 Tax
Expenditures Statement, p163):
1. How
are the tax expenditure amounts estimated and what are the input data used?
Please give details of the data used relating to the years shown in the 2008
Tax Expenditures Statement.
The tax expenditure amounts were calculated using the following
methodology:
-
The taxable value of packaging
cars using the operating cost method (OCM) was considered the benchmark
treatment. This was used to determine the tax that would be payable if the
statutory formula method (SFM) was removed.
-
The calculated forgone income tax
was then compared to the current revenue attained using the statutory formula
method. The difference between the two is the cost of this expenditure.
Input
data included:
-
FBT return from data was used to
provide information on car benefits calculated using SFM and OCM.
-
Individual income tax return data
was used to calculate the marginal tax rates of those with reportable fringe
benefits recorded.
-
External data such as NRMA data
was used to provide estimates on motor vehicle operating costs
-
Statutory interest rates were
fixed at the current level and CPI forecasts were also used.
-
Other assumptions were made to
account for late lodgers, private use of vehicles and growth in the number of
vehicles.
1a. Why was there a big jump in the estimated tax
expenditure between the 2006 and 2007 Tax Expenditures Statements?
In
the 2006 Tax Expenditures Statement, the estimates for this particular tax
expenditure were based on assumption that if the concession did not exist, many
drivers would give up their cars, reducing the estimate of revenue forgone.
Such
a methodology was effectively excluding the current level of concession to
those cars assumed to be ‘forgone’, and was therefore underestimating the total
value of concessions applicable to the total current volume of cars
using the statutory formulas.
This methodology was updated as
part of the estimates presented in the 2007 Tax Expenditures Statement, which
estimate the total value of concessions applicable to all cars currently
utilising the statutory formulas (i.e. prior to any behaviour change). This
methodology change brought its treatment into line with other tax expenditure,
which in turn is consistent with methodology applied in other countries.
The updated methodology effectively removes any impact associated
with the behaviour changes of individuals, and simply analyses the existing
stock of concession utilisation.
2. What is the reliability of the
estimate for past years?
In the 2008 TES, the reliability of this tax expenditure estimate
was reported to be low. This is because it is difficult to be certain of the
distance travelled by packaged cars and therefore the proportion of cars to
allocate to each statutory fraction under the statutory formula method.
Some of the significant uncertainties related to these estimates
are outlined below:
-
Distributions of car prices/
values for which the statutory formula method (SFM) is applied, including
whether there is any relationship between the value of a car and the likelihood
of a particular SFM fraction being applied.
-
Distributions of depreciation,
insurance and registration costs for cars within each SFM range.
-
Distributions of kilometres travelled
within each SFM kilometre range.
-
Distributions of private usage
within each SFM kilometre range, as well as the average level of private usage
within each range.
3. What is the reliability of the
estimate for future years?
4. How are the amounts of actual
private and work-related use by the affected cars estimated?
No data is available on the percentage of private use for individuals
using the operating cost method.
-
The assumed percentage of private
usage under the statutory formula method was used as a proxy for the percentage
of private usage under operating cost method, which forms part of the benchmark
for this TES estimate. Estimates of the percentage of private and work-related
use of estimated cars are benchmarked to observed outcomes relating to the
taxable value of cars reported under each method (SFM and OCM).
5. Is
taxation of cars by the operating costs method concessionary (as could be the
case for example if the statutory depreciation and interest rates were out of
step with true depreciation and interest rates)? If so, what is Treasury's
estimate of the tax expenditure, and is it included in the D24 reported
figures?
The operating
cost method is not considered to be concessional and therefore not included in
TES calculation for this item.
6. Does the reported tax expenditure include exempt
car fringe benefits? If not, what is Treasury's estimate of the tax expenditure
associated with exempt car fringe benefits?
The estimate
for this Tax Expenditure Item (Item D24 in 2008) includes exempt fringe
benefits.
- Employers are required to report
both exempt and non-exempt benefits on their fringe benefits tax return when
reporting fringe benefits related to utilisation of the statutory formula for
valuing car benefits.
7. For each of the last ten years,
please give:
FBT paid relating to car benefits
calculated by the statutory formula method; the number of employers involved;
the number of cars involved;
FBT paid relating to car benefits
calculated by the operating costs method; the number of employers involved; the
number of cars involved.
Fringe Benefits Tax paid relating to car benefits is not able to
be separately identified. The table below provides data for the 10 most
recently available years related to:
-
The taxable value of car benefits (which are then grossed-up
using the Type 2 fringe benefit gross-up rate of 2.0647 to convert them to
reportable fringe benefits and then taxed at the FBT rate of 46.5 per cent
where the fringe benefit is not subject to an exemption);
-
The number of employers involved; and
-
The number of vehicles involved.
For both the Statutory Formula Method (SFM) and Operating Cost
Method (OCM) of valuing car fringe benefits.
Year |
Statutory Formula
Method (SFM) |
Operating Cost
Method (OCM) |
Taxable Value ($m) |
No. of Employers |
No. of Vehicles |
Taxable Value ($m) |
No. of Employers |
No. of Vehicles |
1998-99 |
1,530 |
48,675 |
607,252 |
110 |
17,855 |
99,777 |
1999-00 |
1,577 |
46,940 |
587,622 |
116 |
18,030 |
127,558 |
2000-01 |
1,880 |
43,570 |
773,541 |
141 |
17,735 |
1,609,476 |
2001-02 |
1,593 |
41,985 |
1,521,821 |
135 |
17,730 |
1,100,391 |
2002-03 |
1,567 |
40,790 |
751,330 |
136 |
17,745 |
515,695 |
2003-04 |
1,598 |
40,380 |
3,309,166 |
145 |
18,030 |
869,783 |
2004-05 |
1,644 |
39,565 |
1,185,103 |
147 |
18,215 |
3,048,735 |
2005-06 |
1,674 |
38,490 |
758,689 |
151 |
18,005 |
1,450,932 |
2006-07 |
1,658 |
37,215 |
958,687 |
151 |
17,215 |
1,126,405 |
2007-08 |
1,594 |
34,600 |
977,190 |
144 |
15,675 |
1,156,179 |
Note: Taxable value and number of employer figures are sourced
from FBT Table 7B of 2006-07 Taxation Statistics.
Figures for the number of vehicles are sourced from FBT Table 6B
of 2006-07 Taxation Statistics. However, as incorrect reporting of the number
of vehicles provided by businesses does not impact upon FBT outcomes (which are
calculated on the basis of taxable values reported, with no calculation link
back to the number of vehicles provided), we believe that the figures reported
for the number of vehicles provided cannot be considered reliable.
8. What is the government's knowledge of
the income distribution of the beneficiaries of the tax expenditure (ie the
affected employees, assuming employers pass the benefit through)? For example,
what proportion of the beneficiaries have income at a level that incurs the top
marginal rate?
As fringe benefits related to cars are reported at an employer
level and reportable fringe benefits for each affected individual are not
disaggregated by type, no administrative data is available on which to estimate
the taxable income distribution of affected employees.
9. At the time FBT was established, what was the
policy of making FBT of cars concessionary? Please give references to any
written government policy or statement of the time supporting this.
The original purpose of the statutory method for
valuing car fringe benefits was to apply tax to the private use of the vehicle,
not its use for work purposes, and distance travelled was used as a proxy for
the proportion of business travel. It was designed to provide employers with a
low compliance cost alternative to the operating cost method, eliminating the
need to maintain a vehicle log book, and introduced in 1986.
While
the statutory method does not explicitly distinguish between business and
private use of a vehicle, because a significant proportion of cars provided as
fringe benefits will have some business use, the statutory formula effectively
incorporates a business use element into the valuation of the benefit. This
implicit business use element increases with the annual distance travelled by
the vehicle, such that the FBT payable decreases. The actual concessionality of
the statutory formula method for each taxpayer would depend on their individual
circumstances but the rates were based on assumptions of average use at the
time of introduction.
The
statutory formulas were amended (the statutory percentage was lowered for
people travelling more than 15,000 kms per year) as a result of discussions
with the Australian Democrats, in order to secure the passage of the original
FBT Act, making the rates more concessionary and therefore not necessarily
reflective of assumptions of average use at that time.
10. At present, what is the policy purpose of making FBT of cars concessionary?
The
policy of the FBT statutory formula for valuing car benefits is set out in
Chapter 13 of the Australia’s Tax System Review Consultation Paper of December
2008.
An
employees private use of a taxi, panel van, utility or other commercial car is
exempt from FBT in certain circumstances (for example, travel between work and
home and minor non-work-related use), due to compliance cost savings.
11. What is the present purpose of setting the statutory formula thresholds and
percentages at the chosen numbers? If there is an assumption that the
percentages reflect average amounts of work-related and private use in the
various kilometrage categories, what research or data supports this?
The
current statutory formula percentages were set in 1995. The changes in 1995
increased the rates for all distances travelled. The changes reduced
concessionality, but made no changes to the underlying assumptions.
In the
second reading speech, the then Assistant Treasurer Mr George Gear, MP, stated:
“In order to
maintain the revenue neutrality of this package of compliance cost reduction
measures, the bill will increase the statutory fractions used in the statutory
formula for car benefits by approximately 10 per cent. Even with these
increases in the statutory fractions, the statutory formula will remain
significantly concessional under a wide range of circumstances. This amendment
is estimated to raise $121 million in 1995-96 and $91 million in each later
year.”
No data is
available on the percentage of private use for individuals using the operating
cost method.
The
assumed percentage of private usage under the statutory formula method was used
as a proxy for the percentage of private usage under operating cost method,
which forms part of the benchmark for this TES estimate. Estimates of the
percentage of private and work-related use of the estimated number of cars are
benchmarked to observed outcomes relating to the taxable value of cars reported
under each method (SFM and OCM).
12. What is the government's knowledge
of the extent to which the concessionary aspect of car FBT, and/or the
construction of the statutory formula, encourages use of cars which would not
otherwise occur?
The extent to which current utilisation of cars valued using the
statutory formula method (SFM) is driven by the concessional taxation treatment
applicable under this formula is unknown and uncertain. However, there is some
discussion about these issues in Chapter
13 of the Australia’s Tax System Review Consultation Paper of December 2008 and
in the Review of Australia's Automotive Industry undertaken by the Hon Steve
Bracks.
There are two primary groups for whom the current construction of
the statutory formula will have minimal (if any) impact on their use of cars.
These groups are as follows:
-
Employees who are provided with a car as part of an employment
contract and have no discretion in terms of opting in or out of packaging a car
within their remuneration agreement; and
-
Employees for whom the SFM and the operating cost method (OCM)
provide similar taxation liability outcomes (typically where the percentage of
business use is quite high), but for whom the SFM involves a much simpler
calculation of the tax liability.
No administrative data is available to estimate the size of each
of the groups noted above relative to the total group of employees utilising
the SFM.
13. Is there any practical or administrative impediment to changing the details of
the statutory formula (for example, the number of kilometrage categories, or
the statutory percentages), if the Government should wish to do so?
There
is no legislative impediment to changing the elements of the statutory formula.
The nature of any practical impediments would be dependant on the nature of the
proposed change.
14. Has Treasury done
any modelling of the likely cost to revenue of these scenarios:
-
make employer-provided public
transport fares to and from work an exempt benefit;
-
make employer-provided public
transport fares generally a benefit taxed concessionally to the same degree
that car benefits by the statutory formula method are taxed concessionally.
If so, what were the
results?
Treasury has not
specifically modelled potential costs to revenue for making employer-provided
public transport fares to and from work an exempt benefit, or making it a
benefit taxed concessionally.
TES Item D16 ‘Exemption for free or discounted commuter travel for
employees of public transport providers’ gives expenditure estimates for what
is essentially a subset of taxfilers. Subsection 47(1) of Fringe Benefits
Tax Assessment Act 1986 provides details for this exemption:
-
Where an employer operates a
business of providing transport to the public, the provision of free or
discounted travel (other than in an aircraft) to employees of that business for
the purpose of their travelling to and from work is exempt from fringe benefits
tax.
-
Where an employee’s place of work
is in a metropolitan area, free or discounted travel on a scheduled service
within that area is also exempt from fringe benefits tax.
It is estimated that this exemption leads to revenue forgone of
$25 million per annum from 2009-10.
Concerning fringe benefits taxation of
vehicles other than cars:
15. For each of the last ten years,
please give:
FBT paid relating to vehicle other than
car benefits; the number of employers involved; the number of vehicles
involved.
The value
of fringe benefits tax collected in relation to vehicles other than car
benefits, the number of employers involved and the number of vehicles involved
are all unquantifiable, as this type of fringe benefit is not separately
identified on fringe benefits tax returns submitted by businesses.
16. Does Treasury believe that FBT of
vehicles other than cars is concessionary? Why/ why not? If so, what is the
estimated value of the tax expenditure? Does this include exempt benefits?
The value
of fringe benefits tax collected in relation to vehicles other than car
benefits, the number of employers involved and the number of vehicles involved
are all unquantifiable, as this type of fringe benefit is not separately
identified on fringe benefits tax returns submitted by businesses.
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