Wednesday, March 07, 2007

The environmentally destructive tax rort for cars

Did you know that Australians get bigger tax cuts the more they drive their cars?

Canberra economic journalist Peter Martin reprinted on his blog this media release he received from accounting firm Deloittes, urging people to consider driving their car as much as possible in the next month to reduce their tax bill:

( Drive your benefits further – before it’s too late!

As the end of the FBT year approaches, so does the last chance for significant FBT savings on your salary packaged car.

Deloitte Indirect Tax Principal Frank Klasic said that salary packaged cars remain the most popular fringe benefit provided to employees.

“Although many employees successfully package their cars, there are still many who do not minimise the FBT associated with their car fringe benefit,” Mr Klasic said.

“The easiest way for employees to maximise their FBT savings is to plan ahead before the FBT year ends on 31 March.”

According to Mr Klasic, many employees may be on the cusp of the next kilometre threshold used to calculate FBT using the statutory formula method. Where this is the case, increasing the kilometres driven can also significantly increase your savings.

For example, an employee who has a car valued at $35,000 and drove 24,000km during the FBT year would have an FBT liability of $6,720. Increasing the number of kilometres driven to more than 25,000km would reduce that employee’s FBT liability to just $3,696 – a saving of more than $3,000.

“Employees should be aware that all kilometres driven between now and 31 March will be included when calculating the associated FBT,” Mr Klasic said…

I assume the intent of these parts of Australian tax law is this: If car travel is a legitimate business expense, then it is reasonable for some allowance to be made for the cost of car travel when assessing tax. That’s reasonable as far as it goes, but there’s a couple of problems. First, what we’re talking about here, as I understand it, is businesses providing personal (private) cars to employees as part of their salary package* – not just employees deducting the operating costs of cars for business trips or the use of company cars owned by the company – so whether there really needs to be tax breaks for that in the first place must be questionable. Put another way, if you need to use your car for work, then fine, deduct the cost of that use from your tax. Similarly, if you use a company car for work, then your employer can deduct the cost from its tax bill. But do we really need tax breaks for businesses to provide their employees with their own private vehicles, which they may or may not use for work?

(*What actually happens is that employees arrange this all themselves: they buy a car, transfer it to a lease company and lease it back, and then deduct the costs of the lease from their pre-tax incomes).

The second, related, problem is that it’s hard to work out when a car is needed for business (in which case maybe it’s reasonable for an employee to provide one and for it not to be taxed) and when it’s really just being used for private purposes (in which case it shouldn’t be tax deductible). The Tax Office’s arbitrary solution is to assume that if you drive it far enough, you must have needed it for business – so the further you drive, the less tax you pay. The rate of tax you pay on your car loan repayments ranges from 26% if you drive less than 15,000 km in a year to just 7% if you drive more than 40,000km. However, Deloitte’s media release makes it pretty clear that this encourages driving more, not just for legitimate business, but also to reduce the amount of tax you have to pay, particular if you find yourself near the cusp of one of the tax brackets towards the end of the year.

There’s lots of talk about new measures to discourage the use of fossil fuels and debates about carbon taxes, carbon trading, mandatory renewable targets and so on. But a good start would be simply removing the economically questionable and environmentally damaging tax breaks that exist for private cars.


Peter said...

Interesting post. I have a lot of friends in Australia with company cars, and they go through this every year -- consciously planning driving to get over the next threshold.

signature103 said...

We really need to change people's attitudes - individuals and management - to the idea of gain. What they gain materially is what they lose spiritually.

It has everything to do with honesty. And there should be honesty without having the the police or government to keep a check on us. If you cannot show some self-control and responsibility then you are not being honest about what kind of person you are.

Thanks, David.

David Jeffery said...

Peter, yes - after writing this post I spoke to a friend who was going to be out of Sydney for the next 3 weekends on driving trips just to get the reading on his car over the required amount. Last weekend he drove to Canberra for the day specifically because he 'needs kilometres on the car before the end of March'.

Signature - I agree with your sentiments but I'm not sure they really fit neatly here. When people decide whether to buy a car, one of the things they look at is how much it will cost them, which includes tax issues, and I think it's reasonable to do that. Now, after they've bought the car and get to March and realise they'll pay an extra $3,000 unless they drive 1,000 km in the next few weeks, they get in their cars and drive. I don't really think that's unreasonable either.

Yes, people should take responsibility for their own actions, we don't want governments telling us all to drive less. But that doesn't mean governments should provide measures that actively encourage people to waste resources. That's what they're doing.

Anonymous said...

My lecturer likes to give this example where another lecturer at uni used to travel from from his house in northern sydney, to newcastle and then to penrith most mornings just to reach the nominated distance he had originally agreed upon. Honestly can you think of a worse way to waste resources and time. There needs to be major policy shifts which provide these type of incentives.

Anonymous said...

The Government stupidity was wonderful for me when I first got my license (late 80's)
Although I had my own budget car, I would often be encouraged to drive my parents business car on long trips.
Not only did it save me money, but it saved the business money, by wasting fuel.