Ever since Prime Minister Kevin Rudd announced changes to the fringe benefit tax on motor vehicles, the government framed the issue with talk of “rorts” and “fat cats”. While Labor have spruiked the changes as “good tax policy”, critics have warned that it will spell the end to domestic car manufacturing, suggesting the measures will affect sales of locally-made cars twice as much as imported vehicles.
But is the current scheme really a rort? Novated leasing was first legislated in 1986 by the Hawke Labor government. The rules are being re-worked by the current Rudd Labor government on advice from the Henry Tax Review.
Following the rules, as legislated, isn't a rort.
Are the people who use novated leases “fat cats”? Treasurer Chris Bowen says that 66% of people with novated leases earned more than $100,000. But the industry body responsible for novated leases reviewed its membership data and found more than 70% of their customers earn less than $100,000. Additionally 82% of them are charity workers, police, teachers, civil servants and nurses.
Who's telling the truth? Both directly contradict one another - but neither party has provided supporting data to back up their claims.
“Good tax policy” however, is key for me. The simplistic argument here is that the current rules allow people to reduce their tax, regardless of whether they use the vehicle for work or not. This is contrary to the intent of the original legal framework and should therefore be rolled back. Based on this argument it seems pretty reasonable to return to the original rules.
Reality is more complicated. The economy is an ecosystem; changing one thing always impact on others. This is particularly true where industries are profundly interconnected.
The current approach to FBT has been in place for many years and the economy has adapted to it. The impact of this change doesn’t simply end with the people using novated leases. Consider this:
- About 21% of new cars sold in Australia are purchased with a novated lease.
- An estimated 35% of cars (about 82,000) on novated leases are manufactured locally.
- Health and charity organisations, which have lower rates of pay than private enterprise, rely on these benefits (along with salary packaging) to attract and retain staff.
When the announcement was made there were immediate impacts:
- About 300 jobs were lost in the first week.
- Many companies and governments (e.g. Qantas and the ACT) suspended car purchases.
- Ford has had the first of 6 ‘stop work’ days due to a significant fall in demand.
The fall in car demand is temporary but the impact of a sudden announcement without consultation is clear. It has quickly caused significant disruption to the automotive industry.
Prime Minister Kevin Rudd recently announced an additional $200 million of assistance to car manufacturers to offset some these unintended consequences.
What he hasn't said is whether we will also address the impact to health and charity workers who will have a reduction in their take home pay and what future unintended consequences will eventuate.
It seems to me that regardless of whether you support the original FBT approach or the Henry Tax Review recommendations, the implementation of this policy has undermined its effectiveness.
Shane Riley has an MBA from Macquarie Graduate School of Management and is a senior manager in the financial services industry.
