Proposed Changes to FBT

Calls to Action

While we are still waiting for finer details, the proposed changes to remove the Statutory Method in calculating the Fringe Benefits Tax (FBT) liability on car benefits provided to employees is intended by the Government to give rise to a significant increase in the FBT liability. There are side-effects in our view, including increased record-keeping requirements for employers and an immediate slowdown in fleet company purchases due to uncertainty resulting from this announcement and the significant media attention it has created.

Regardless of the success of the legislation in passing through Parliament, dealers and manufacturers need to take action now to address a potential fleet sale slowdown.

One of the Government's assumptions is that with technology, such as car log book apps it is far easier for taxpayers to prepare log books and the Statutory Method represents some type of tax subsidy. As such, these apps remove the onerous recording-keeping requirements. In our view, this is not the case for retail motor dealers because dealership staff use a different stock car daily, making it difficult to not only track the usage of the different cars but also the cost attributable to usage of that particular car on that particular day.

Furthermore, with the increase of any FBT liability there may also be an increase in the on-costs for employers, such as payroll tax.

As such, many dealers are now considering car allowances as a real alternative to providing employees with cars.

This announced measure will have a significant impact on both motor dealers and car manufacturers.

There are a number of areas to consider for motor dealers:

1. Potential loss of the pooling concession available pursuant to MT 2023
2. Increased compliance costs for employers and employees 

Potential Fleet sales slowdown while the uncertainty around the surprise announcement remains. This appears to be the case in the short term regardless of success of the current government passing this legislation

• Currently, motor vehicle dealers have access to the Pooling Method as prescribed by MT 2023 in determining the FBT liability on pooled cars. This Pooling Method is predicated on the basis that the FBT liability on these cars is to be calculated using the Statutory Method.

Dealerships' demonstration stocks tend to have a rapid turnover rate and there exists a high ratio of pool vehicles to employees. With the announcement to scrap the Statutory Method from 1 April 2014, this would suggest the pooling method will no longer be available to employers.

Due to the way these pooled demonstrator vehicles are used, if you were to apply the Operating Cost Method to these vehicles, the record-keeping would be extremely onerous for both employers and employees.

Consequently, unless there is a "carve out" in the proposed legislative changes for pooled vehicles it may mean the complete loss of the Pooling Method. The only other alternative solution to continue the simplification of the valuation of cars provided by dealers would be a similar administrative concession under the Operating Cost Method. However, there has been no indication that the Government has considered either of these alternatives.

• Should dealers lose access to the Pooling Method, they will need to track the daily use of cars by employees on a cost, driver and kilometre basis under the Operating Cost Method. We note that even though the FBT legislation is clear as to which costs are to be included when applying the Operating Cost Method, the allocation of operating costs to specific vehicles will remain a challenge for dealers; for example, where all vehicles are filled with fuel from an on-site fuel pump there is no guidance as to how the costs should be allocated to each vehicle.

The compliance costs associated with this change would require dealers to employ further resources, including extra controls to track these costs.

Furthermore, dealers would need to educate their employees as to the classification of the use of vehicles. This would involve taking account of which trips are considered private in nature vs. those that are classified as business travel. This distinction will need to be recorded for each trip, as a 12-week log book (as is required under the FBT legislation) is unlikely to accurately reflect the use of a large pool of demonstrator vehicles by multiple employees.

The loss of the Pooling Method would mean that dealers may need to consider other alternatives which may involve scrapping salary packaging entirely and providing staff with a car allowance. While this option may be tax effective for dealers in some circumstances, we note some manufacturer brands insist that their franchised retail motor dealers provide sales staff with demonstrator trading stock to drive for private use.

The Government's removal of tax concessions around salary packaging and company cars using the Statutory Method would likely affect businesses that provide their employees with car benefits, including by way of novated leases. In our view, this could reduce the sales demand for new motor vehicles in the short term.

The Government's unexpected announcement may cause many businesses to suspend new car settlements until they receive more clarity from the Government about the changes to the FBT provisions. This could effectively introduce a risk to the industry that business fleets and employees who are salary sacrificing their vehicles will put off buying a car until they get more certainty, possibly until after the federal election.

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