Tuesday, 16 July 2013

Motor Vehicles. Why Today's Announcement by the Goverment Could Cost You.

Kevin Rudd formally announced a change in policy concerning the pricing of carbon today. In all honesty this change will have marginal, if any, impact on most of us and the way we live our lives. However one of the initiatives announced in order to pay for this change will end up impacting a lot of small businesses out there, and it has nothing to do with electricity.

Fringe Benefits can mean a lot of things, but in an employment setting it relates to all the non-cash  benefits you get, or have access to. Up until 1985 this was a lucrative part of a person's overall remuneration, and included company paid restaurant meals, entertainment, and certainly the use of company cars for private use.

A lot of that changed with the instroduction of Fringe Benefits Tax by the Hawke Government in 1986. Almost overnight, those business involved in corporate entertainment, such as restaurants, saw their sales smashed as many businesses sought to reduce their exposure to this new tax by cutting out the entertainment altogether.

Fringe Benefits Tax affected a whole variety of other non-cash payments as well, including low interest loans, housing benefits, discounted stock and motor vehicles.

Motor Vehicles were always going to be a tricky part of Fringe Benefits Tax law, as a lot of cars are genuinely used for business purposes. Think of people in sales or itinerant contractors and professionals, driving from client to client to client, every day. "Cars aren't a fringe benefit, they are a necessary part of doing business", was the argument from the corporate sector. And, to an extent, the government agreed.

Fringe Benefits Tax on cars were therefore allowed to be calculated in one of two ways. The first was by calculating the private use of a car, after completing a log book for 12 weeks showing what that private use was (The Operating Cost Method). Great for some, especially if you could keep the necessary paperwork showing high business use.

The other method was a calculation involving the price of the car and the total kilometres travelled. This was known as the Statutory Formula Method. This ended up being the default calculation for those unwilling, or unable, to keep log books.

A couple of years ago the Statutory Formula Method got a bit of a make-over. Up until then, the more kilometres you drove annually, the smaller the effective calculation was. For example the Fringe Benefits Tax was calculated based on 7% of the cost of the car if you were driving more than 40,000 km annually (as opposed to 26% of the cost of the car if you drove less than 15,000 km per year). If you drove a lot (and not necessarily for work purposes either) you could significantly reduce your exposure to this tax. The changes that were brought in were to scrap (over time) the different percentages so that eventually the Fringe Benefit was going to be calculated based on 20% of the cost of the car. The Operating Cost Method was still allowed.

Today's change will effectively scrap the ability to use the Statutory Formual Method on any car bought as part of a salary package from today onwards. Any existing cars used in salary packaging will still have the two options available to calculate the least amount of Fringe Benefits Tax Payable.

"So what?" you might ask. As a small business owner, especially one operating in a company or trust structure that owns your car, this change could potentially cost you a couple of thousand dollars a year in tax. Think about this:

  • You currently own a car and are considering trading it in for a new one. You have never kept a log book and have been happy to use the Statutory Formula Method to calculate the Fringe Benefit Value of the car.  If you change the car now, that option goes out the window.  Do you delay that purchase? For how long?
  • Your business has salary packaged not only your car, but your spouse's car as well. The spouse's car needs changing.  How useful is it going to be to keep a log book for that car? What do you do with the salary packaging there?
  • You bite the bullet and start a log book for your car. You use the car for private purposes more than you thought. How will this impact on your tax?
  • You keep a log book and are subsequently audited by the tax office, who reject your log book as being incorrectly completed. Now what?

A lot of questions. Not many answers. Certainly none that are going to provide certainty for an already struggling automotive industry. Salary packaging firms will also feel the pinch. The ABC reported this afternoon:
Shares in McMillian Shakespeare, one of Australia's biggest providers of salary-sacrificing services, plunged by 15 per cent after the announcement before being placed in a trading halt.
If you are not in small business you won't perhaps understand the potential ramifications that this announcement will bring. And bearing in mind that the government believes it will raise $1.8 billion over the next few years, it will affect a lot of businesses.

However, if you are not in small business, think about this. Do you currently get your vehicle salary packaged as part of your employment? You may be a nurse, a teacher, or even a government employee. You don't use your car much for work purposes. The potential cost to you for any car you may want to salary package will be just as significant as it is for a small business owner.

Now, whilst this has only been announced by Government today. a lot of things will need to happen before this becomes law.  If Parliament is recalled before the election you know that both the Liberal and National parties will oppose this tax change. There is also the possibility that the Greens will reject this measure as they don't appear happy with the overall package being announced today. So there is a chance this will not occur this side of the election. If Parliament is not recalled, then this may well become part of the policy platform for the Labor Party. A pretty bold move, given that the unions associated with the automotive industry will more than likely oppose this.  After the election then? Who knows.

Still, this potentially has some pretty nasty ramifications for small business owners, and cannot be ignored.