On 16 July 2013, the Federal Government announced that it will bring the Carbon Tax to an early end on 30 June 2014 and move to an Emissions Trading Scheme from that date. As part of the Government's plans to compensate for the lost tax revenue, it announced that it will remove the 'statutory formula method' of valuing car fringe benefits. The statutory formula method uses a 'statutory percentage' of 20% of the cost of the car as a proxy for the value of the private use of the car when calculating the fringe benefits tax (FBT). This method currently eliminates the need to keep extensive logbooks of business and private trips and in many cases provides a slight tax advantage, which is why it is popular for salary packaging.
The removal of the statutory formula method is proposed to apply from 1 April 2014 (the start of the next FBT year) and will apply to any new arrangements to provide cars to employees entered into after 16 July 2013. This means that for any new arrangements, employees will be forced to keep a logbook for 12 weeks of all business and private use and this will set the 'private percentage' use of the car which will determine the FBT.
This is expected to increase both the tax and the compliance burden from car fringe benefits and many believe it will lead to the death of the 'salary packaged car'. At the very least, we expect it will stall many new car sales until after the next election when there will be more certainty as to whether the proposed law will go ahead.
The important thing for the moment is not to panic. The provision of cars to employees under an arrangement that existed on 16 July 2013 will not be affected by these rule changes and the statutory formula method will continue to apply.
However, for new car arrangements, or current arrangements that are substantially varied, the outcome of the announcement will depend on the upcoming Federal Government election. The announcement is currently only Labor Party policy and will not get introduced before the next election and potentially, only if the Labor Party retains Government.
If you are planning to introduce new car arrangements for employees before the election, we recommend you budget as if the statutory formula method will be removed and that FBT will apply under a logbook method.
We would be pleased to assist you to model tax cost scenarios for both methods to assist you with your choice. In many cases, FBT costs are borne by employees as part of their total salary packages. Changes in FBT arrangements may give rise to broader remuneration discussions. Kelly Langdon, our employment partner, can also assist with any performance remuneration, salary benchmarking and salary packaging issues that might arise from these FBT changes.
Please contact your usual Hanrick Curran advisor for further information.