Illustrating the perverse Fringe Benefits Tax statutory formula for employer-provided cars

There was a chart on page 10 of the recently released Henry Tax Review Overview report that really caught my attention. It shows the kms travelled by employer-provided cars in Australia.

The massive spikes are a result of rate thresholds in the much-despised Fringe Benefits Tax (FBT) statutory formula for employer-provided cars, where travelling more kilometres often reduces your total costs.

In this method, the taxable value of the fringe benefit is essentially a percentage of the value of the car, and the percentage used depends on the total kms travelled each year:

  • Less than 15,000km – 26%
  • 15,000 – 24,999km – 20%
  • 25,000 – 40,000km – 11%
  • Over 40,000km  – 7%

These are not marginal rates, because the kms travelled is not directly used in the calculation of taxable value. Hence getting into the next bracket reduces your rate and your total tax bill, despite the marginal increase in direct running costs. This is utterly perverse as it provides an incentive for people to drive more kms, increasing congestion and greenhouse emissions!

There is also an operating costs method where the taxable value is essentially the proportion of running costs that were for private use (which is actually quite logical!). People are currently free to choose whichever method involves paying less tax. If there is a lot of personal use, then the statutory formula is often the way to go (travelling to and from work is generally classed as private travel).

So I’ve looked at the total cost of car ownership for a $35,000 car that has per-km costs of 17 cents per km, and standing costs of $167 per week (roughly the running costs of a Holden Commodore according to the RACV), using the fringe benefits tax rate of 46.5%. I’ve also assumed 70% private use when using the operating costs method.

The following chart shows the net running cost of such a vehicle, depending on the annual kms travelled, by both the statutory formula and operating cost methods:

You can see the step reductions in total costs when reaching each threshold in the statutory formula. In this example:

  • Driving 15,000 kms instead of 14,999 kms saves you $976
  • Driving 25,000 kms instead of 24,999 kms saves you $1465
  • Driving 40,000 kms instead of 39,999 kms saves you $488

These are big incentives to drive more kms!

You can also see that the operating costs method is not particularly attractive if most of the car’s use is private.

The FBT year ends March 31st each year. So is there evidence of big driving holidays in March each year as people try to get their kms over the next threshold?

The following chart shows the average monthly automotive gasoline sales for Australia for the period 2005-2009 (Source: Australian Petroleum Statistics). March stands out as the second highest month of the year for automotive fuel sales.

The FBT statutory formula might be responsible for the high average March figure, but I am a little reluctant to make that conclusion because I just don’t know enough about the other influences on monthly fuel sale volumes in Australia. Perhaps someone more knowledgeable than me could comment.

Advertisements

2 Responses to Illustrating the perverse Fringe Benefits Tax statutory formula for employer-provided cars

  1. Jane says:

    I’m not more knowledgeable but I think that’s such a great point. I’d never heard of this until someone I used to work with told me she drives up and down the freeway to get her Ks up before the deadline. Absolutely ridiculous.

    Like

  2. Marcus says:

    Higher fuel sales in March could have been influenced by Easter driving holidays: but for 2005-09 the dates don’t quite line up, with April being low.

    https://en.wikipedia.org/wiki/List_of_dates_for_Easter

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: