FBT on cars – what the change really means

Co-founder of the Switzer Report
Print This Post A A A

This article has nothing to do with superannuation – unless you are a shareholder in the McMillan Shakespeare Group or possibly carsales.com.

However, because the reporting of the change about how FBT is calculated on motor vehicles provided to staff for their private use has been so bad – and there is so much interest in the subject – I thought I should have a go. In fairness to the press, the Politicians are just as bad. Minister for Everything and Deputy Prime Minister, Mr Albanese, clearly didn’t understand the change when he was interviewed on Lateline on Wednesday.

Here goes.

The change

If a car is provided by an employer for the private use of an employee, there are currently two methods for calculating the fringe benefits tax. The ‘statutory formula method’, or the ‘operating cost method’. The methods are very, very different.

This change abolishes the ‘statutory formula method’.

Importantly, existing contracts are not impacted – they will be allowed to run their full term. So, if you already have a lease, you will be allowed to continue using the ‘statutory formula’ method until the lease expires.

The change only affects new contracts (ie new leases) taken out after 16 July 2013, or material variations to existing contracts, and will come into effect from the start of the ‘fringe benefits tax year’ on 1 April, 2014

The statutory formula method

The ‘statutory formula method’ was simplified on 10 May 2011, when a single ’statutory rate’ of 20% was introduced. Irrespective of the number of kilometres actually travelled, the taxable value for FBT purposes is 20% of the car’s original cost price.

So, if a car costs $30,000, the taxable value for FBT purposes is $30,000 x 0.20 = $6,000.

The taxable value is then grossed up, and the employer pays FBT at 46.5%, which in this case is $5,214 tax.

Any contribution the employee makes to the running costs of the car, for example by paying for petrol and keeping receipts, reduces the taxable value and FBT. In fact, the FBT can be reduced to zero.

Using the same example, if the employee pays for $2,000 of petrol costs, the taxable value for FBT purposes is ($30,000 x 0.20) – $2,000 = $4,000.

The operating cost method

This method is based on the operating costs of the car (rather than the purchase price), and the proportion of private use of the car as recorded in a log book.

Operating costs include leasing costs, fuel, insurance, repairs and service organisation membership.

So, if the operating costs of a car are $15,000 ($10,000 lease costs and $5,000 fuel and insurance), and if the proportion of private use is 40%, then the taxable value for FBT purposes is $15,000 x 0.40 = $6,000.

Like the statutory method, any contribution the employee makes to the running costs of the car reduces the taxable value.

What it will mean for an employee

Employees will now need to keep a log book, where they record the kilometres travelled for business use, and the kilometres travelled for private use. The log book only needs to be maintained for a continuous period of 12 weeks – and once the private use proportion is established, is valid for up to five years.

As can be seen in the above example, the methods are fundamentally very different with one based on original cost price, the other on annual operating cost. Notwithstanding what the politicians might try to say, the statutory formula does not assume that the private usage proportion is only 20%.

That said, given that the Government has calculated that it will net an additional $1.8 billion over the forward estimates, it is pretty safe to assume that many employees’ private usage proportion is going to be pretty high and that their FBT costs are going to rise.

Technically, while the employer is liable for the FBT, most employers will pass on this cost to their employees through the salary packaging arrangements.

While there will no doubt be some “creative” log books from employees with existing arrangements, the local car industry’s justifiable fear is that demand for new cars will fall as employees choose not to take new leases on.

Stocks impacted

McMillan Shakespeare (MMS), the leading provider of salary packaging services, remains suspended. After the announcement on Tuesday, its stock price fell from $17.84 to $15.35, before going into a trading halt.

Carsales.com (CRZ) dropped 4.85% last week, on fears that any impact the change might have in the new car market could potentially flow through to the second hand market. The stock was recovering this morning, with the market appearing to put this concern to one side.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report:

Also from this edition

View More Articles